Estimating Static Models of Strategic Interactions

Bajari, Patrick; Hong, Han; Krainer, John; Nekipelov, Denis

doi:10.1198/jbes.2009.07264

Cited by 205 publications

(203 citation statements)

References 39 publications

(43 reference statements)

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“…Identi…cation therefore requires that the tendency to provide larger stores in general be unrelated to the idiosyncratic forces driving store size to be large in any particular local market. In the context of peer e¤ects, Bajari et al (2010) demonstrate that instrument validity hinges on …nding a covariate of an agent's action that does directly impact the actions of other agents. In the case of supermarkets, it seems reasonable to assume that the reactions of a single store to its competitors actions in that market only depend on the competitor's actions outside that market through its actions in that market.…”

Section: The Nature Of Local Conductmentioning

confidence: 99%

Supermarkets as a Natural Oligopoly

Ellickson

2012

Economic Inquiry

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This paper proposes and tests a model of supermarket competition based upon John Sutton's (1991) endogenous …xed cost (EFC) framework. The relevance of the EFC framework to supermarket competition stems from the industry's surprisingly uniform competitive structure: irrespective of the size of the local market, a small number of …rms (between 3 and 6) capture the majority of sales. As markets grow, local rivalry drives …rms to expand their …xed investments, limiting the number of …rms that can pro…tably enter even the largest markets. Although markets stay concentrated, competition remains …erce, re ‡ecting the inherently rivalrous nature of the underlying competitive mechanism. The goal of this paper is to identify the strategic focus of this rivalry, namely the drive to provide an ever greater variety of consumer products, and to eliminate alternative explanations for the observed structure by highlighting the unique form of …rm conduct that characterizes this industry.

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Section: The Nature Of Local Conductmentioning

confidence: 99%

Supermarkets as a Natural Oligopoly

Ellickson

2012

Economic Inquiry

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“…While empirical interest in discrete games of complete information dates to the seminal work of Bresnahan and Reiss (1991a&b), our approach is more closely connected to the incomplete information framework proposed by Rust (1994) and implemented by Seim (2006) and Bajari et al (2010). 2 In particular, the incomplete information assumption is key to breaking a system of equations into a collection of single agent problems in which selection can be addressed directly.…”

Section: Introductionmentioning

confidence: 99%

“…1 We illustrate our estimation technique with an empirical exercise that builds on an earlier analysis of supermarket pricing strategies. In a recent paper, Ellickson and Misra (2008) treat a supermarket's pricing decision as a discrete, store level game between rival chains and estimate the parameters of a reduced form pro…t function using techniques developed in Bajari et al (2010). While they …nd strong evidence of assortative matching by strategy (i.e.…”

Section: Introductionmentioning

confidence: 99%

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Enriching interactions: Incorporating outcome data into static discrete games

Ellickson

Misra

2011

Quant Mark Econ

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When modeling the behavior of …rms, marketers and micro-economists routinely confront complex problems of strategic interaction. In competitive environments, …rms make strategic decisions that not only depend on the features of the market, but also on their beliefs regarding the reactions of their rivals. Structurally modeling these interactions requires formulating and estimating a discrete game, a task which, until recently, was considered intractable. Fortunately, two-step estimation methods have cracked the problem, fueling a growing literature in both marketing and economics that tackles a host of issues from the optimal design of ATM networks to the choice of pricing strategy. However, most existing methods have focused on only the discrete choice of actions, ignoring a wealth of information contained in post-choice outcome data and severely limiting the scope for performing informative counterfactuals or identifying the deep structural parameters that drive strategic decisions. The goal of this paper is to provide a method for incorporating post-choice outcome data into static discrete games of incomplete information. In particular, our estimation approach adds a selection correction to the two-step games approach, allowing the researcher to use revenue data, for example, to recover the costs associated with alternative actions. Alternatively, a researcher might use R&D expenses to back out the returns to innovation.The authors would like to thank participants at the 2007 Choice Symposium at the University of Pennsylvania and the 2007 QME conference at the University of Chicago. The authors have bene…tted from conversations with Patrick Bajari, Jeremy Fox, Han Hong, and Harikesh Nair and would also like to thank the editors and two anonymous referees for many helpful comments. All remaining errors are our own.

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“…That is, the equilibrium selection mechanism does not jump discontinuously from the 'high-type' equilibrium to the 'low-type' (i.e., P A ) or to the 'middle-type' (i.e., P B ). 3 Assumption 2 seems a reasonable condition when the researcher is interested in evaluating the effects of a change in the structural parameters but keeping in the counterfactual the same equilibrium type as the one that generates the data.…”

Section: Modelmentioning

confidence: 99%

A method for implementing counterfactual experiments in models with multiple equilibria

Aguirregabiria

2012

Economics Letters

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This paper proposes a method for implementing counterfactual experiments in estimated models that have multiple equilibria. The method assumes that the researcher does not know the equilibrium selection mechanism and wants to impose minimum restrictions on it. Our key assumption is that the equilibrium selection function does not jump discontinuously between equilibria as we change marginally the structural parameters of the model. Under this assumption, we show that, although the equilibrium selection function is unknown, the researcher can obtain an approximation of this function in a neighborhood of the estimated values of the structural parameters. Under the additional assumption that the counterfactual equilibrium is stable, this approximation can be combined with iterations in the equilibrium mapping to obtain the exact counterfactual equilibrium. We illustrate the differences between our approach and other methods, such as the selection of a counterfactual equilibrium that is closer to the equilibrium in the data, and equilibrium mapping iterations using the equilibrium in the data as the initial value. We show that, in general, these alternative methods are not consistent with the assumption that the equilibrium selection mechanism is continuous with respect to the structural parameters.

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Estimating Static Models of Strategic Interactions

Cited by 205 publications

References 39 publications

Supermarkets as a Natural Oligopoly

Supermarkets as a Natural Oligopoly

Enriching interactions: Incorporating outcome data into static discrete games

A method for implementing counterfactual experiments in models with multiple equilibria

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