Entry Game Research Articles

Identification and estimation of entry games under symmetry of unobservables

Abstract This paper provides a new point identification and estimation method for two-player entry games with complete information, based on symmetry of unobservables. Neither equilibrium selection nor parametric distributional assumptions are required. In addition, a weaker support condition is used relative to the existing literature. Unlike other semiparametric estimators, the estimator proposed here is $\sqrt{n}$-consistent. A test of the required symmetry condition is provided. Monte Carlo evidence shows that the estimator performs well with moderate sample sizes, and is robust to unimodal and multimodal error distributions. The estimator is applied to an entry game of discount retailers in Jia (2008). Our results suggest that researchers should apply the normality assumption with caution.

Accounting conservatism as a strategy to deter entry: Evidence from China's Negative List System

This paper examines the market force and real effect of accounting conservatism from the perspective of an entry game. Using China's Negative List System (NLS), a nationwide deregulation policy resulting in a significant increase in new business registrations of new entrants, we find that incumbents affected by the NLS, especially those at competitive frontiers within an industry, increasingly adopt accounting conservatism in reaction to the NLS-induced market changes. Additional tests indicate that the underlying mechanism lies in the imposing threat of entry, effectively ruling out the alternative explanations related to corporate governance. Moreover, we observe that industries exhibiting a higher inclination towards conservative accounting tend to be less susceptible to new entrants. This finding suggests that the adoption of accounting conservatism could be interpreted as a tactical measure to deter new entrants.

Identification and estimation of sequential games of incomplete information with multiple equilibria

This paper discusses the identification and estimation of game-theoretic models, mainly focusing on sequential games of incomplete information. In most empirical games, researchers cannot observe the exact order of actions played in the game and rely on the assumption of simultaneous actions. My structural modeling generalizes an empirical game to encompass simultaneous and sequential actions as special cases. I specify a sequential game allowing for multiple players in each stage and multiple Perfect Bayesian Nash Equilibria, showing that the structural parameters, including the payoff function parameters, the order of actions, and the equilibrium selection mechanism, are separately identified. The various exclusion restrictions in the finite mixture literature help attain point identification of structural parameters and provide a testable method to verify identification conditions. Next, I consider a Sieve Minimum Distance (SMD) estimator of Ai and Chen (2003) for the structural parameters and verify its asymptotic properties. The Monte Carlo simulations evaluate the performance of the proposed estimator and provide numerical evidence of potential bias under the misspecified order of actions. The empirical application of Walmart and Kmart’s entry game demonstrates that retailers compete sequentially in a significant portion of markets.

Local linearization based subvector inference in moment inequality models

This paper introduces a bootstrap-based profiling inference method for subvectors in moment inequality models following insights from Bugni et al. (2017). Compared to their paper, the new method calculates the critical value by searching over a local neighborhood of a pre-estimator, instead of the whole null parameter space, to profile out nuisance parameters. In this way, non-linear moment conditions are simplified by linear expansion and the bootstrap iterates over quadratic programming problems, which significantly simplifies and accelerates computation. This method controls asymptotic size uniformly over a large class of data generating processes. In the Monte Carlo simulations, the new procedure improves upon the computing time of Bugni et al. (2017) and Kaido et al. (2019) significantly. I provide an empirical illustration estimating an airline entry game.

Equilibrium uniqueness in entry games with private information

AbstractWe study equilibria in static entry games with single‐dimensional private information. Our framework embeds many models commonly used in applied work, allowing for firm heterogeneity and selective entry. We introduce the notion of strength, which summarizes a firm's ability to endure competition. In environments of applied interest, an equilibrium in which entry strategies are ordered according to the firms' strengths always exists. We call this equilibrium herculean. We derive simple and testable sufficient conditions guaranteeing equilibrium uniqueness and, consequently, a unique counterfactual prediction.

Uniform Pricing as a Barrier to Entry

This paper considers an entry game in which an incumbent firm operates in a number of markets and a potential entrant can enter multiple or all of the markets. While price discrimination has usually been thought of as a barrier to entry, in our model it is not and instead, charging a uniform price across the markets can discourage entry. Partial entry occurs when the two firms' products are highly substitutable. In this case, uniform pricing raises the profits of both the incumbent and the entrant but reduces consumer and total welfare relative to price discrimination.

Inference in an incomplete information entry game with an incumbent and with beliefs conditioned on unobservable market characteristics

We consider a static entry game played between an incumbent and a collection of potential entrants. Entry decisions are made with incomplete information and beliefs are conditioned, at least partially, on a market characteristic that is unobserved by the econometrician. We describe conditions under which, even though the unobserved market characteristic cannot be identified, a subset of parameters of the model can still be identified, including all the strategic-interaction effects. We also characterize testable implications for strategic behavior by the incumbent when this player is able to shift the unobserved market characteristic to deter entry. We present results under Bayesian Nash equilibrium (BNE) and under the weaker behavioral model of iterated elimination of nonrationalizable strategies. Our empirical example analyzes geographic entry decisions in the Mexican internet service provider (ISP) industry. This industry has an incumbent, América Móvil (AMX), which established a widespread geographic presence as a monopolist following the privatization of Telmex in 1990. Our results show significant strategic interaction effects between AMX and its competitors, as well as evidence of strategic behavior by AMX to deter entry and maximize its market share.

Entry game in supply chains with yield uncertainty

<p style="text-indent:20px;">Yield uncertainty presents great challenges to supply chain management, which affects market supply and thus the profits of all the supply chain parties. In the context of a supply chain comprising a retailer and multiple potential suppliers with random yields, we examine the impact of yield uncertainty on the suppliers' entry decisions, and how it affects the retailer's profit and consumer surplus. We find that yield uncertainty initially increases the number of suppliers entering the market, then decreases, and it is negatively correlated with consumer surplus. We also analyze how the retailer's purchasing price strategy influences the suppliers' decisions to enter the market. We find that retailer subsidies can improve the performance of and coordinate the supply chain. In addition, the subsidy contract is in the forms of production subsidy and surplus subsidy when the suppliers do not make and make production decisions, respectively.</p>

License Complementarity and Package Bidding: US Spectrum Auctions

US spectrum licenses cover geographically distinct areas and often complement each other. A bidder seeking to acquire multiple licenses is exposed to the risk of winning only isolated patches. Using Auction 73 data, we model the bidding process as an entry game with interdependent markets and evolving bidder beliefs. Bidders’ decisions on bidding provide bounds on licenses’ stand-alone values and complementarity between licenses. We show that the effects of package bidding on bidders’ exposure risks depend on package format and size. More importantly, package bidding increases auction revenue substantially at the cost of reducing bidder surplus and increasing license allocation concentration. (JEL D44, H82, L96)

Strategic Entry with Correlated Private Information

This article studies how the correlation of players’ private information affects their strategic be haviour. We introduce information correlation into a static two-player strategic substitutes entry game. The degree of information correlation is measured by the correlation coefficient of a symmetric joint normal distribution, which is used to model players’ prior distribution. It is found that a cutoff strategy cannot be used for all values of correlation coefficient to solve the game, and there exists a threshold correlation coefficient value to differentiate the unique-equilibrium and the multiple (three)-equilibria situations, given other parameters. Finally, by comparative statics analysis of symmetric equilibrium strategies, we find that increasing the payoff of entry encourages players to adopt a lower entry threshold, while increasing the information correlation or jointly increasing the variances of prior distribution increases the positive entry threshold and lowers the negative entry threshold. JEL Codes: C72, D21, D82, L13

Bayesian Games with Rationally Inattentive Players

We study how scarcity of attention affects strategic choice behaviour in a 2-player incomplete information entry game. Scarcity of attention is a common psychological character among population ( Kahnemann, 1973 , Attention and effort, Prentice Hall), and it is modelled by the rational inattention approach introduced by Sims (1998 , Carnegie-Rochester Conference Series on Public Policy, 49, 317–356). In this game, players acquire information about their private payoff shocks at a cost, which follows a high-low binary distribution. We find that high information cost can generate multiple equilibria, and the number of equilibria differs with respect to different ranges of information cost. The number of equilibria could be 1, 5 or 3. Increasing the information cost could encourage or discourage a player to choose entry in some equilibria. This depends on whether the prior probability of high payoff shocks is greater than a given threshold value. We also exhibit a necessary and sufficient condition of parameter specification such that with the same set of parameters satisfying this condition, both the rational inattention Bayesian game and a Bayesian quantal response equilibrium game where the observation errors are additive and follow a Type-I extreme value distribution can have a common equilibrium. JEL: C72, D91

Explaining Excess Entry in Winner-Take-All Markets

We report experimental data from standard market entry games and winner-take-all games. At odds with traditional decision-making models with risk aversion, the winner-take-all condition results in substantially more entry than the expected-payoff-equivalent market entry game. We explore three candidate explanations for excess entry: blind spot, illusion of control, and joy of winning, none of which receive empirical support. We provide a novel theoretical explanation for excess entry based on cumulative prospect theory and test it empirically. Our results suggest that excess entry into highly competitive environments is not caused by a genuine preference for competing, but is instead driven by probability weighting. Market entrants overweight the small probabilities associated with the high payoff outcomes in winner-take-all markets, while they underweight probable failures. This paper was accepted by Yan Chen, behavioral economics and decision analysis. Funding: This work was supported by the Schweizerischer Nationalfonds zur Förderung der Wissenschaftlichen Forschung [Grants 100018_182185 and 26022621] and the Dr. h.c. Emil Zaugg-Fonds [Grant B11162135]. Supplemental Material: The data files and e-companion are available at https://doi.org/10.1287/mnsc.2022.4397 .

Limit pricing and entry game of renewable energy firms into the energy sector

Governments attempt to provide the energy sector with incentives to replace old technologies with new renewable energy ones as the most effective way to combat climate change. Yet, in the energy sector prevail fossil fuel incumbents that might inhibit renewable energy entrants. Our paper provides a game-theoretic stylization of competition between those two types of firms. Incumbents set prices, and entrants respond with quantity adjustments. In the context of a dynamic limit pricing model, we study the entry dynamics in a market in which the dominant firms (fossil fuel energy suppliers) face the entry of a group of competitive fringe firms (renewable energy suppliers) when the dominant firms have easier access to financial markets but, the fringe firms fund their expansion with internal finance. We also investigate the effect of the public support for renewable energy firms through subsidies. Our model is built on Judd and Peterson (1986, JET), but our solutions are obtained through a non-linear model predictive control (NMPC) algorithm. By this technique, we can predict the outcome of the competition between incumbents and entrants and the impact of financial and fiscal policies considering moving-horizon strategies.

Cultural Affinity, Regulation, and Market Structure: Evidence from the Canadian Retail Banking Industry

We estimate a perfect information static entry game to study the effect of cultural entry barriers on entry and competition in the retail banking industry. Canada provides a favorable setting for analysis due to its high linguistic diversity, concentrated market, and regulatory entry barriers. We find that cultural affinity between customers and financial institutions that share a common cultural origin plays an important role in explaining the comparative advantages of these institutions in certain markets. Using several counterfactual experiments and additional empirical evidence, we show that the effectiveness of regulations intended to foster competition is significantly limited by cultural barriers, which is a key determinant that shapes the competitive landscape of the industry. (JEL G21, G28, L13, Z13)

Market Structure and Competition in Airline Markets

We provide an econometric framework for estimating a game of simultaneous entry and pricing decisions while allowing for correlations between unobserved cost and demand shocks. We use our framework to account for selection in the pricing stage. We estimate the model using data from the US airline industry and find that not accounting for endogenous entry leads to biased estimation of demand elasticities. We simulate a merger between American and US Airways and find that product repositioning and postmerger outcomes depend on how we model the characteristics of the merged firm as a function of the premerger firms’ characteristics.

Price competition and nominal illusion: experimental evidence and a behavioural model

The standard approach to nominal illusion in Economics sees it as a transitory phenomenon, as economic agents eventually see through the nominal veil, making the right choices. Recent empirical studies suggest that money illusion may persist, distorting real prices in a variety of economic environments, including the housing market and the stock market. In this paper, we explore the emergence and persistence of nominal illusion in an experimental entry game where firms must choose which local market to enter, and then compete in prices. All local markets are equivalent in real terms and they only differ in the currency the price competition is run under. Our experimental results show a positive, persistent and monotone effect of the nominal exchange rate on market prices, statistically significant for large enough exchange rate. We provide an explanation in terms of players simplifying the choice set using discrete grids.

Identification in simple binary outcome panel data models

SummaryThis paper first reviews some of the approaches that have been taken to estimate the common parameters of binary outcome models with fixed effects. We limit attention to situations in which the researcher has access to a data set with a large number of units (individuals or companies, for example) observed over a number of time periods. We then apply some of the existing approaches to study fixed-effects panel data versions of entry games, like the ones studied in Bresnahan and Reiss (1991) and Tamer (2003).

Effects of Southwest Airlines on Carrier Profits and Entry Probabilities

This paper studies the effects of Southwest Airlines, the largest low-cost carrier (LCC) in the U.S., on other carriers’ payoff functions and entry probabilities. A static entry game model is developed and estimated by viewing entry as an indicator of underlying profitability and making use of Nash Equilibrium. Results indicate that Southwest has a remarkable and negative impact on the payoffs of other carriers. This impact is firm-specific, with LCCs being more affected than full-service carriers (FSCs). Comparing the two service types, the results show that Southwest’s nonstop presence apparently imposes more downward pressure on opponents’ profits than its connecting presence. A counterfactual experiment is then conducted. Once Southwest is counterfactually removed, the probability of each carrier entering a market significantly changes. This paper examines Southwest’s impacts from a new perspective and extends literature on entry game estimation.

Simultaneous production decisions in agricultural contexts: an experimental investigation of pesticide use, animal welfare and wheat production

PurposeFarmers often decide simultaneously on crop production or input use without knowing other farmers' decisions. Anticipating the behavior of other farmers can increase financial performance. This paper investigates the role of other famers' behaviors and other contextual factors in farmers' simultaneous production decisions.Design/methodology/approachMarket entry games are a common method for investigating simultaneous production decisions. However, so far they have been conducted with abstract tasks and by untrained subjects. The authors extend market entry games by using three real contexts: pesticide use, animal welfare and wheat production, in an incentivized framed field experiment with 323 German farmers.FindingsThe authors find that farmers take different decisions under identical incentive structures for the three contexts. While context plays a major role in their decisions, their expectations about the behavior of other farmers have little influence on their decision.Originality/valueThe paper offers new insights into the decision-making behavior of farmers. A better understanding of how farmers anticipate the behavior of other farmers in their production decisions can improve both the performance of individual farms and the allocational efficiency of agricultural and food markets.

Identification of firms’ beliefs in structural models of market competition

AbstractFirms make decisions under uncertainty and differ in their ability to collect and process information. As a result, in changing environments, firms have heterogeneous beliefs on the behaviour of other firms. This heterogeneity in beliefs can have important implications on market outcomes, efficiency and welfare. This paper studies the identification of firms’ beliefs using their observed actions—a revealed preference and beliefs approach. I consider a general structural model of market competition where firms have incomplete information and their beliefs and profits are nonparametric functions of decisions and state variables. Beliefs may be out of equilibrium. The framework applies both to continuous and discrete choice games and includes as particular cases models of competition in prices or quantities, auction models, entry games and dynamic games of investment decisions. I focus on identification results that exploit an exclusion restriction that naturally appears in models of competition: an observable variable that affects a firm's cost (or revenue) but does not have a direct effect on other firms’ profits. I present identification results under three scenarios—common in empirical industrial organization—on the data available to the researcher.