Working Paper: CEPR ID: DP14975
Authors: Victor Aguirregabiria
Abstract: Firms make decisions under uncertainty and differ in their ability to collect and process information. As a result, in changing environments, firms have heterogeneous beliefs on the behavior of other firms. This heterogeneity in beliefs can have important implications on market outcomes, efficiency, and welfare. This paper studies the identification of firms' beliefs using their observed actions -- a revealed preference and beliefs approach. I consider a general structural model of market competition where firms have incomplete information and their beliefs and profits are nonparametric functions of decisions and state variables. Beliefs may be out of equilibrium. The framework applies both to continuous and discrete choice games and includes as particular cases models of competition in prices or quantities, auction models, entry games, and dynamic investment games. I focus on identification results that exploit a natural exclusion restriction in models of competition: an observable variable that affects a firm's cost (or revenue) but does not have a direct effect on other firms' profits. I present identification results under three scenarios --- common in empirical IO --- on the data available to the researcher.
Keywords: nonequilibrium beliefs; structural models of competition; identification; revealed beliefs approach
JEL Codes: C57; D81; D83; D84; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firms' beliefs can be identified through their observed actions (L20) | market outcomes (P42) |
| heterogeneous beliefs about the behavior of other firms (D83) | market outcomes (P42) |
| firms make decisions under uncertainty (D25) | heterogeneous beliefs about the behavior of other firms (D83) |
| observable factors that influence a firm's costs without affecting competitors' profits (D43) | identification of firms' beliefs (D83) |
| data availability scenarios (C81) | different identification outcomes for firms' beliefs and structural parameters (D83) |