Entry Games Under Private Information

Abstract

We study market entry decisions when firms have private information about their profitability. We generalize current models by allowing general forms of market competition and heterogeneous firms that self-select when entering the market. Post-entry profits depend on market structure, and on the identities and the private information of the entering firms. We introduce a notion of the firm's strength and show that an equilibrium where players' strategies are ranked by strength, or herculean equilibrium, always exists. Moreover, when profits are elastic enough with respect to the firm's private information, the herculean equilibrium is the unique equilibrium of the game.

Global Games With Strategic Substitutes

“…This problem has been addressed in the empirical industrial organization literature (Bresnahan and Reiss, 1990; Berry, 1992; Scott Morton, 1999; Berry and Reiss, 2007), and some solutions have been proposed in the theoretical literature. Espin‐Sanchez and Parra (2018) provide equilibrium selection by adding private information (see footnote ), and Quint and Einav (2005) propose a war of attrition in the entry game that has a unique equilibrium outcome. Generally, payoffs in an entry game are the market equilibrium payoff minus the entry cost if entering and zero otherwise; thus, if firms differ only in the entry cost, then such a game fits the setting described at the end of the previous paragraph.…”