Strategic Entry with Correlated Private Information

Abstract

This article studies how the correlation of players’ private information affects their strategic be haviour. We introduce information correlation into a static two-player strategic substitutes entry game. The degree of information correlation is measured by the correlation coefficient of a symmetric joint normal distribution, which is used to model players’ prior distribution. It is found that a cutoff strategy cannot be used for all values of correlation coefficient to solve the game, and there exists a threshold correlation coefficient value to differentiate the unique-equilibrium and the multiple (three)-equilibria situations, given other parameters. Finally, by comparative statics analysis of symmetric equilibrium strategies, we find that increasing the payoff of entry encourages players to adopt a lower entry threshold, while increasing the information correlation or jointly increasing the variances of prior distribution increases the positive entry threshold and lowers the negative entry threshold. JEL: C72, D21, D82, L13