Testing for Asymmetric Dynamic Oligopoly Models

In this paper, we specify a theoretical dynamic oligopoly model with regard to asymmetric firms. We then estimate a structural dynamic model of demand and pricing relations for the semiconductor industry. Using quarterly firm-level output and cost data as well as industry prices from 1974 to 1996, we estimate whether market conduct is symmetric or asymmetric, and how different groups of firms behave in the product market. We also control for other industry characteristics, such as multiproduct firms, learning by doing,\\ economies of scale, and spillover effects. The effects are also allowed to vary over the product life cycle. The main result of the paper shows, that in contrast to previous findings or assumptions, market conduct and mark-ups are asymmetric. Large firms behave like Cournot players, whereas small firms behave as if in perfect competition, indicating that they charge prices close to overall marginal costs. Consequently, small firms behave like price takers, which is a very reasonable result, as their small size does not allow for having an impact on market price. Moreover, we provide evidence for the multiproduct firm's character, learning and economies of scale effects. Finally, we provide evidence that a firm's current output and the rivals' output in the future are intertemporal strategic substitutes.