qualities of the products marketed, the costs of production, and the prices charged by all firms. They also determine the likely impacts of investments, the likelihood of potential entrants’ appearing, and the costs or benefits generated by an exit decision. The framework assembles the primitives in a coherent fashion and uses them to numerically analyze problems that could not be analyzed with simpler theoretical models. The primitives must be realistic, he emphasized, which means that the person working with the model must have direct access to information about the industry. The user can then use the framework to generate quantitative responses to changes in the business environment or in a policy.
Then he discussed the simplest form of the framework, which he said was a publicly available program found on his web site.6 The simple form is used mostly for teaching. “The world is a complicated place,” he said, “and we want to show students what can happen if you change a tax, a tariff, or an entry barrier and let the whole industry evolve differently.” When used for research, the framework needs to be extended to incorporate the major institutional features of the industry being studied. The framework has a static portion and a dynamic portion.
Each static model consists of a demand system and a set of cost functions, one for each producer, along with an equilibrium assumption. In the simple applications, this allows one to solve for reasonable pricing or quantity-setting decisions of firms that are faced with the demand and cost primitives. If we were using a Nash equilibrium pricing assumption, for example, the program would solve for a set of prices at which each firm is doing its best, given the prices of other firms. This is a reasonable “textbook” equilibrium assumption.
This static pricing assumption will determine the prices, and through the prices the quantity, of each product sold. This plus the cost functions enables the program to compute the profits of each firm as well as consumer benefits. The profits of each firm are calculated as a function of the characteristics of the firm’s and its competitors’ products and cost functions. The program computes profits for each of the firms for all possible characteristic combinations.
The dynamic model goes a step further and feeds these profit functions into another program, which analyzes the investments in developing the characteris-