Discrete choice models of firms’ strategic decisions

Abstract

This paper outlines the methods and applications related to the nascent area of empirical discrete games in marketing. Many key strategic decisions firms make involve discrete choices such as deciding the location of a new store, determining where in product space to position a product, or what options to offer in a service contract. These decisions are fairly complex and typically involve the consideration of a number of demand, cost, and competitive factors. What makes these discrete choices particularly interesting (and challenging to analyze) is that they are interrelated with the choices of other firms because firms take into account the actions of their competitors when making their own decisions. We describe the basic problem of dealing with interrelated discrete choices in a game-theoretic framework and present the various estimation methods available. A discussion of the existing applications and future research opportunities concludes the article.

Quality Differentiation with Flavors: Demand Estimation of Unobserved Attributes

“…Greater variety of products in a specific market implies intense price competition, affecting the prices of the products negatively. Recent literature has incorporated the product assortment as an endogenous variable to the model (see Draganska et al 2008;Draganska, Mazzeo and Seim 2009;Mazzeo 2002;Seim 2006;Allender and Richards 2010). Taking advantage of the modeling strategy developed by this literature, we assume product assortment is exogenous and it affects the price.…”

Markov chain Monte Carlo for incomplete information discrete games

“…For comparison purposes we also estimated the model using a 2-step approach and …nd that both methods recover 10 For example, a simple two step estimator might o¤er reasonable starting values. 11 As a frame of reference, a traditional MH routine resulted in a <2% acceptance rate after 200,000 iterations.…”

“…The initial values for the routine were chosen at random rather than possibly more informative values. 10 We allowed for a maximum of one thousand best response iterates in the manifold step although no more than 200 were ever used. The chain converged quite quickly for the scale of the problem and in no case did the best-response iteration fail to converge.…”

Assessing Excess Profits from Different Entry Regulations

“…Bresnahan and Reiss (1990) resolved this problem by aggregating the non-unique Nash equilibrium outcomes into a Nash equilibrium in a simultaneous or sequential game. 14 Any observed market con…guration n is a Nash equilibrium outcome if and only if the random component of payo¤s, "; satis…es the following condition:…”