Dynamic Games in Empirical Industrial Organization

TL;DR

This survey reviews theoretical models, econometric methods, and empirical applications of dynamic games in industrial organization, highlighting recent advances and ongoing challenges in the field.

Contribution

It provides a comprehensive overview of the theoretical frameworks, estimation techniques, and empirical studies in dynamic games within industrial organization, including recent methodological innovations.

Findings

Discussion of Markov Perfect Nash Equilibrium and its representations.

Overview of estimation methods for dynamic games with multiple equilibria.

Review of empirical applications across various industries and policy issues.

Abstract

This survey is organized around three main topics: models, econometrics, and empirical applications. Section 2 presents the theoretical framework, introduces the concept of Markov Perfect Nash Equilibrium, discusses existence and multiplicity, and describes the representation of this equilibrium in terms of conditional choice probabilities. We also discuss extensions of the basic framework, including models in continuous time, the concepts of oblivious equilibrium and experience-based equilibrium, and dynamic games where firms have non-equilibrium beliefs. In section 3, we first provide an overview of the types of data used in this literature, before turning to a discussion of identification issues and results, and estimation methods. We review different methods to deal with multiple equilibria and large state spaces. We also describe recent developments for estimating games in continuous time and incorporating serially correlated unobservables, and discuss the use of machine learning methods to solving and estimating dynamic games. Section 4 discusses empirical applications of dynamic games in IO. We start describing the first empirical applications in this literature during the early 2000s. Then, we review recent applications dealing with innovation, antitrust and mergers, dynamic pricing, regulation, product repositioning, advertising, uncertainty and investment, airline network competition, dynamic matching, and natural resources. We conclude with our view of the progress made in this literature and the remaining challenges.