Dynamic oligopoly models of investment behavior

This thesis consists of three chapters on dynamic oligopoly models. In the first chapter, I emphasize the importance of strategic behavior by entrants. I provide a model of endogenous entry in which potential entrants can influence their product quality in the entry stage by varying the level of sunk investments they make at the time of entry. If the entrants are allowed to influence the distribution of quality in their favor, I demonstrate that they act strategically and their decisions depend on the market structure. Whenever the industry consists of firms with low quality goods, entrants invest substantially and vice versa.;In the second chapter, I focus on the effects of import competition on the investment incentives and the productivity of domestic firms. Firm-and plant-level empirical studies typically find that trade liberalization squeezes price-cost margins among import competing firms, that this heightened competitive pressure induces productivity gains among these same firms, and that further efficiency gains come from market share reallocations. Using a computable industrial evolution model to simulate the dynamic effects of import competition, we explore what types of managerial behavior, long-term transition paths and welfare effects are consistent with this set of stylized facts.;In the third chapter, I examine empirically how policies that lower entry costs affect welfare and find evidence that such policies might lead to a welfare loss. First, I develop a structural industrial evolution model with strategic interactions in which firms choose prices in the static game and enter, exit, and invest in the dynamic game. Then, I estimate the parameters of both the static and the dynamic game for the Colombian engines and turbines industry. The estimation recovers the demand and cost parameters as well as the investment costs and scrap value and sunk entry cost distributions. I then simulate the model and find that lower sunk entry costs lead to a decrease in welfare by reducing incentives to invest. The industry is dominated by high-cost firms which charge higher prices. Firms also find it optimal to accommodate entry rather than spend resources on entry deterrence.