Computational industrial economics: A generative approach to dynamic analysis in industrial organization

Approach to Dynamic Analysis in Industrial Organization This chapter offers a basic agent-based computational model of industry dynamics that allows us to study the evolving industry structure through entry and exit of heterogeneous firms. The field of modern industrial economics focuses on the structure and performance of the industry in equilibrium when firms make decisions in an optimizing way, typically with perfect foresight. The patterns that arise in the process of adjustment, induced by persistent external shocks, are often ignored for lack of a proper tool for analysis. The model introduced here induces turbulence in market structure through unpredictable shocks to the firms' technological environment. The base model presented here enables the analysis of interactive dynamics between firms as they compete in a changing environment with limited rationality and foresight. A possible extension of the base model, allowing for R&D by firms, is also discussed.