Estimation of evolutionary models as a tool for research in industrial organization

This paper develops a structural evolutionary microeconomic model where the forces of chance and selection are at work and matches this model to data. As a concrete example we explore the process of industry concentration by modeling bottom-up starting with profit maximizing firms and introducing stochastic elements at various levels of the market. An estimation procedure is developed to connect the model to data of the U.S. household laundry equipment industry. The results for the structural model are then contrasted to a version of Gibrat’s model estimated with the same approach. It turns out that the structural model provides a more accurate account of the historical data. This indicates that capturing links between firms operative through the market mechanism promises a more accurate assessment of the future course of concentration of an industry. © 2007 Elsevier Inc. All rights reserved. JEL classification: C150; D410; L600; L680