Discrete Games with Flexible Information Structures: An Application to Local Grocery Markets

Abstract

Game-theoretic models are frequently employed to study strategic interaction between agents. Empirical research has focused on estimating payoff functions while maintaining strong assumptions regarding the information structure of the game. I show how to relax informational assumptions to enhance the credibility of empirical analysis in discrete games. I propose the use of a flexible information structure that nests the most common assumptions used in the discrete games literature. Despite the added flexibility, the parameters of the players’ payoff functions remain point identified under standard rich support assumptions. As is common in discrete-choice games, multiple equilibria complicate identification and inference in empirical applications. I introduce an approach to equilibrium selection that avoids parametric assumptions and lets selection depend on public information that is not observed by the econometrician. I apply the method to data on the entry and exit patterns of grocery stores. The model provides useful bounds to equilibrium outcomes. In addition, the empirical analysis indicates that more restrictive informational assumptions commonly used in empirical applications models can generate qualitatively misleading counterfactual outcomes.