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Enriching Interactions: Incorporating Outcome Data into Static Discrete Games

36 Pages Posted: 10 Mar 2011 Last revised: 12 Oct 2012

Paul B. Ellickson

University of Rochester - Simon Business School

Sanjog Misra

University of Chicago - Booth School of Business

Date Written: July 27, 2011

Abstract

When modeling the behavior of firms, marketers and micro-economists routinely confront complex problems of strategic interaction. In competitive environments, firms 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.

Keywords: static discrete games, selection, non-parametric

JEL Classification: M31, C14, C35

Suggested Citation

Ellickson, Paul B. and Misra, Sanjog, Enriching Interactions: Incorporating Outcome Data into Static Discrete Games (July 27, 2011). Quantitative Marketing and Economics, 10(1), pp. 1-26, 2012. Available at SSRN: https://ssrn.com/abstract=1782810

Paul B. Ellickson

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Sanjog Misra (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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