Monday, September 9, 2013
Posted by D. Daniel Sokol
Flavio Menezes and John Quiggin are Inferring the strategy space from market outcomes.
ABSTRACT: In this paper we show that, if demand varies stochastically, and firms compete after the realization of demand shocks, the strategy space may be inferred from market evidence. The key idea is that, in equilibrium, each firm acts as a monopolist, choosing the optimal price-quantity combination from a residual demand curve determined by a given observation of market demand and the (equilibrium) strategies of the other firms.