Industry dynamics, investment, and market structure

Industrial organization (IO) uses game-theoretic models to study the functioning of markets with the objective of improving the efficacy of policy analysis and our understanding of business strategy. This thesis studies two important topics in IO: computational tools to analyze dynamic oligopoly models, and competition in industries with congestion effects.; Dynamic models of imperfect competition can be used to study industries in which outcomes are determined by strategic dynamic considerations. Despite their importance, the curse of dimensionality involved in solving for the equilibrium has severely limited the use of these models in many applications. In Chapters 2 and 3 of this thesis we propose approximation methods that dramatically reduce the computational complexity of dynamic oligopoly models.; In Chapter 2 we develop a simple algorithm for computing an "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. We provide conditions for which our method closely approximates an equilibrium for large markets. We develop bounds that can be computed to assess approximation error for any given application. Through computational experiments, we find that the method often generates useful approximations for industries with hundreds of firms and in some cases even tens of firms.; In Chapter 3 we study important extensions of oblivious equilibrium, including approximation methods for short-run dynamic behavior of industries; for industries with aggregate shocks; and approximation methods in which firms keep track of few dominant firms. The methods in Chapters 2 and 3 greatly expand the set of dynamic industries that can be analyzed computationally.; In Chapter 4 we analyze investment incentives and market structure in oligopoly competition for industries with congestion effects. Firms compete by choosing prices and investments; investment mitigates the congestion disutility experienced by consumers. We develop game-theoretic models to analyze whether competition between profit-maximizing firms leads to efficient outcomes in different scenarios. Our model and results provide a framework through which a range of service industries can be studied, offering guidance for policy analysis.