Models of strategic interactions have a profound effect on the economics of industrial organization. The entry behavior of a firm into an oligopoly market typical depends on the entry behavior of other competing firms. Many firm entry models have a game theoretic foundation. Understanding the empirical contents of game theoretic models, in which the strategic choices of competing firms are mutually interdependent, has important implication on the economic policies of antitrust and regulation. The information structure of strategic competition models can be differentiated based whether firms maximize static or dynamic expected profits, and whether each competing firm possesses private information that can not be observed by other market participants. Several research projects supported by this NSF grant aim to study econometric models of strategic interactions where competing firms choose between a finite number of mutually exclusive actions.
The first project studies identification and estimation of static versions of game theoretic strategic competition models under the private information assumption. An algorithm is developed to compute the entire set of equilibria in these models. Application of these estimation and computation methods to the market of stock analyst recommendations discovers strong evidence of peer influence and substantial impact of multiple equilibria.
The second project extends the static models to a dynamic setting where competing firms interact repeatedly in a Markov perfect equilibrium. The results of the analysis show that the structural parameters of these models can be identified from data on the entry behavior of firms. The identification analysis naturally leads to a flexible nonparametric estimator and a practical semi-parametric estimator for dynamic oligopolistic models with both continuous and discrete state variables. A unique data set on oil exploration is being collected to demonstrate the empirical predictions of these models. The third project allows for a complete information setting where latent shocks to firm profits are commonly observable to all the firms and agents. A feasible computation algorithm is developed to facilitate estimating these models with multiple and mixed strategy equilibria. Application of this algorithm to entry behavior in California highway procurement auctions recovers significant entry costs by bidding firms and significant multiple equilibria determinants of entry behavior.
Broader impacts. The results of this research have potentially important economic applications beyond those in the field of industrial organization. The econometric methods developed in these research projects will be useful for problems in applied microeconomics where the utilities of agents are interdependent and agents interact strategically. Examples include peer effects in public finance and agglomeration in urban economics.
