Nonparametric probability bounds for nash equilibrium actions in a simultaneous discrete game

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Abstract

We study a simultaneous, complete-information game played by p=1,...,P agents. Each p has an ordinal decision variable Yp∈A{script}p={0,1,...,Mp}, where Mp can be unbounded, A{script}p is p's action space, and each element in A{script}p is an action, that is, a potential value for Yp. The collective action space is the Cartesian product A{script}=∏p=1PA{script}p. A profile of actions y∈A{script} is a Nash equilibrium (NE) profile if y is played with positive probability in some existing NE. Assuming that we observe NE behavior in the data, we characterize bounds for the probability that a prespecified y in A{script} is a NE profile. Comparing the resulting upper bound with Pr[Y=y] (where Y is the observed outcome of the game), we also obtain a lower bound for the probability that the underlying equilibrium selection mechanism ℳ chooses a NE where y is played given that such a NE exists. Our bounds are nonparametric, and they rely on shape restrictions on payoff functions and on the assumption that the researcher has ex ante knowledge about the direction of strategic interaction (e.g., that for q≠p, higher values of Yq reduce p's payoffs). Our results allow us to investigate whether certain action profiles in A{script} are scarcely observed as outcomes in the data because they are rarely NE profiles or because ℳ rarely selects such NE. Our empirical illustration is a multiple entry game played by Home Depot and Lowe's.

Original languageEnglish (US)
Pages (from-to)135-171
Number of pages37
JournalQuantitative Economics
Volume2
Issue number2
DOIs
StatePublished - Jul 2011

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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