Industry Dynamics Foundations For Models with an Infinite.pdf

NBER WORKING PAPER SERIES INDUSTRY DYNAMICS: FOUNDATIONS FOR MODELS WITH AN INFINITE NUMBER OF FIRMS Gabriel Y. Weintraub C. Lanier Benkard Benjamin Van Roy Working Paper 16286 /papers/w16286 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 August 2010 The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2010 by Gabriel Y. Weintraub, C. Lanier Benkard, and Benjamin Van Roy. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Industry Dynamics: Foundations For Models with an Infinite Number of Firms Gabriel Y. Weintraub, C. Lanier Benkard, and Benjamin Van Roy NBER Working Paper No. 16286 August 2010 JEL No. D43,E22,L13 ABSTRACT This paper explores the connection between three important threads of economic research offering different approaches to studying the dynamics of an industry with heterogeneous firms. Finite models of the form pioneered by Ericson and Pakes (1995) capture the dynamics of a finite number of heterogeneous firms as they compete in an industry, and are typically analyzed using the concept of Markov perfect