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Strategic Entry with Correlated Private Information

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  • Rongyu Wang

Abstract

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

Suggested Citation

  • Rongyu Wang, 2024. "Strategic Entry with Correlated Private Information," Journal of Interdisciplinary Economics, , vol. 36(2), pages 133-165, July.
    • Handle: RePEc:sae:jinter:v:36:y:2024:i:2:p:133-165
    DOI: 10.1177/02601079221100885
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    References listed on IDEAS

    as
    1. Haiqing Xu, 2014. "Estimation of discrete games with correlated types," Econometrics Journal, Royal Economic Society, vol. 17(3), pages 241-270, October.
    2. Liu, Nianqing & Vuong, Quang & Xu, Haiqing, 2017. "Rationalization and identification of binary games with correlated types," Journal of Econometrics, Elsevier, vol. 201(2), pages 249-268.
    3. Martin Pesendorfer & Philipp Schmidt-Dengler, 2008. "Asymptotic Least Squares Estimators for Dynamic Games -super-1," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 901-928.
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    More about this item

    Keywords

    Correlated private information; strategic substitutes; game theory; big data;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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