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Industry Dynamics With Stochastic Demand

Author

Listed:
  • James Bergin

    (Queen's University)

  • Dan Bernhardt

    (University of Illinois)

Abstract
We study the dynamics of an industry subject to aggregatedemand shocks where the productivity of a firm's technology evolvesstochastically over time. Each period, each firm, given the aggregatedemand shock, the productivity of its technology, and the distributionof technology productivities in the economy, (i) chooses whether toremain in the industry or to exit to sell its resources to an entrant;and (ii) an active firm chooses how much capital and labor to employ,and hence output to produce. To characterize the intertemporalevolution of the distribution of firms, we discuss in particular how exit decisions, aggregate output, profits and distributions offirm productivities vary, (a) across different demandrealization paths; (b) along a demand history path, detailingthe effects of continued good or bad market conditions; and (c) fordifferent anticipated future market conditions. Sufficient conditions are provide for worse demand realizations to lead toincreased exit of low-productivity firms and then to improveddistributions of firms at all future dates and states. Finally, it is shown that a downturn in demand can raise welfare due to the impact on exit decisions.

Suggested Citation

  • James Bergin & Dan Bernhardt, 2006. "Industry Dynamics With Stochastic Demand," Working Paper 1043, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:1043
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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1043.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Dennis Fok & André Stel & Andrew Burke & Roy Thurik, 2019. "How entry crowds and grows markets: the gradual disaster management view of market dynamics in the retail industry," Annals of Operations Research, Springer, vol. 283(1), pages 1111-1138, December.
    2. John Duggan, 2011. "Noisy Stochastic Games," RCER Working Papers 562, University of Rochester - Center for Economic Research (RCER).
    3. Taub, B., 2023. "Signal-jamming in the frequency domain," Games and Economic Behavior, Elsevier, vol. 142(C), pages 896-930.
    4. Maria José Gil-Moltó & Dimitrios Varvarigos, 2012. "Industry Dynamics and Indeterminacy in an OLG Economy with Endogenous Occupational Choice," Discussion Papers in Economics 12/09, Division of Economics, School of Business, University of Leicester, revised Sep 2012.
    5. John Duggan, 2012. "Noisy Stochastic Games," RCER Working Papers 570, University of Rochester - Center for Economic Research (RCER).
    6. Santanu Roy & Takashi Kamihigashi, 2004. "Investment, Externalities & Industry Dynamics," Econometric Society 2004 North American Summer Meetings 144, Econometric Society.

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    More about this item

    Keywords

    stochastic heterogeneity; aggregate shocks; exit; thin markets; demand uncertainty;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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