A Quantal Response Model of Firm Competition
WORKING PAPER
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This paper proposes a model of “classically” competitive firms facing informational entropy constraints in their decisions to potentially enter or exit markets based on profit rate differentials.
The result is a three parameter logit quantal response distribution for firm entry and exit decisions. Bayesian methods are used for inference into the the distribution of entry and exit decisions conditional on profit rate deviations and firm level data from Compustat is used to test these predictions. The model parameters show a fluctuating asymmetry in firm exit decisions, an increase in dispersion of negative profit rate differentials, and a falling general rate of profit.