Informational Asymmetries, Strategic Behavior, and Industrial Organization

Abstract

One of the most active and exciting areas of economic research over the last several years has been the use of noncooperative games of incomplete information to model industrial competition. This work has yielded not only a remarkable number of papers but also several new insights on and explanations of fundamentally important issues. The purpose of this paper is to attempt an appreciation and evaluation of this work. Because most of our individual and joint work since about 1979 has been in this mode, it will come as no surprise that we are proponents of this line of research. However, there are several questions and potential problems that we see as arising in connection with this methodology, and we will attempt to address these. First, a disclaimer. We are not attempting a survey of the applications of asymmetric information games (AIG) to industrial organization, although we will refer in a highly selective fashion to a number of prominent strands in this literature. (In particular, where any references are provided at all, they are typically only to the earliest contributions to a subject.) Even more, we do not deal with work in which informational asymmetries are important but the analysis is not game theoretic (for example, search and price dispersion, or the early work on the lemons problem and on moral hazard and adverse selection in insurance markets) or with game-theoretic treatments that assume complete information. I. AIG Methods and Applications

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