Inference in an incomplete information entry game with an incumbent and with beliefs conditioned on unobservable market characteristics

Abstract

Abstract We consider a static entry game played between an incumbent and a collection of potential entrants. Entry decisions are made with incomplete information and beliefs are conditioned, at least partially, on a market characteristic that is unobserved by the econometrician. We describe conditions under which, even though the unobserved market characteristic cannot be identified, a subset of parameters of the model can still be identified, including all the strategic-interaction effects. We also characterize testable implications for strategic behavior by the incumbent when this player is able to shift the unobserved market characteristic to deter entry. We present results under Bayesian Nash equilibrium (BNE) and under the weaker behavioral model of iterated elimination of nonrationalizable strategies. Our empirical example analyzes geographic entry decisions in the Mexican internet service provider (ISP) industry. This industry has an incumbent, América Móvil (AMX), which established a widespread geographic presence as a monopolist following the privatization of Telmex in 1990. Our results show significant strategic interaction effects between AMX and its competitors, as well as evidence of strategic behavior by AMX to deter entry and maximize its market share.