An Empirical Framework for Discrete Games with Costly Information Acquisition

TL;DR

This paper introduces a new econometric framework for static discrete choice games where players strategically choose the precision of their information, affecting their decisions and market outcomes.

Contribution

It develops a unified model allowing for strategic information acquisition in discrete games, with point identification and empirical validation.

Findings

Low-cost carriers acquire less precise information and incur lower costs.

Information strategies explain heterogeneity in market entry and competition.

Model is validated through Monte Carlo experiments.

Abstract

This paper develops a novel econometric framework for static discrete choice games with costly information acquisition. In traditional discrete games, players are assumed to perfectly know their own payoffs when making decisions, ignoring that information acquisition can be a strategic choice. In the proposed framework, I relax this assumption by allowing players to face uncertainty about their own payoffs and to optimally choose both the precision of information and their actions, balancing the expected payoffs from precise information against the information cost. The model provides a unified structure to analyze how information and strategic interactions jointly determine equilibrium outcomes. The model primitives are point identified, and the identification results are illustrated through Monte Carlo experiments. The empirical application of the U.S airline entry game shows that the low-cost carriers acquire less precise information about profits and incur lower information costs than other airlines, which is consistent with their business model that focuses on cost efficiency. The analysis highlights how differences in firms' information strategies can explain observed heterogeneity in market entry behavior and competition.