"Bayesian Estimation of Entry Games with Multiple Players and Multiple Equilibria"

Onishi, Yuko and Yasuhiro Omori

October 2014

Entry game models are often used to study the nature of firms’ profit and the nature of competition among firms in empirical studies. However, when there are multiple players in an oligopoly market, resulting multiple equilibria have made it difficult in previous studies to estimate the payo↵ functions of players in complete information, static and discrete games without using unreasonable assumptions. To overcome this difficulty, this paper proposes a practical estimation method for an entry game with three players using a Bayesian approach. Some mild assumptions are imposed on the payoff function, and the average competitive effect is used to capture the entry effect of the number of firms.
Our proposed methodology is applied to Japanese airline data in 2000, when there are three major airline companies, ANA, JAL and JAS. The model comparison is conducted to investigate the nature of strategic interaction among these Japanese airline companies.