Markov Perfect Industry Dynamics With Many Firms

The authors propose an approximation method for analyzing Ericson and Pakes (1995)-style dynamic models of imperfect competition. They define a new equilibrium concept that they call "Oblivious equilibrium," in which each firm is assumed to make decisions based only on its own state and knowledge of the long run average industry state, but where firms ignore current information about competitors' states. The great advantage of oblivious equilibria is that they are much easier to compute than are Markov perfect equilibria. Moreover, they show that, as the market becomes large, if the equilibrium distribution of firm states obeys a certain "Light-tail" condition, then oblivious equilibria closely approximate Markov perfect equilibria.