Discrete Choice Models of Firms' Strategic Decisions

Discrete Choice Models of Firms' Strategic Decisions

By
Michaela Draganska, Sanjog Misra, Victor Aguirregabiria, Pat Bajari, Liran Einav, Paul Ellickson, Dan Horsky, Sridhar Narayanan, Yesim Orhun, Peter C. Reiss, Katja Seim, Vishal Singh, Raphael Thomadsen, Ting Zhu
Marketing Letters.
2008, Vol. 19, Issue 3-4, Pages 399-416

This paper outlines the methods and applications related to the nascent area of empirical discrete games in marketing. Many key strategic decisions firms make involve discrete choices such as deciding the location of a new store, determining where in product space to position a product, or what options to offer in a service contract. These decisions are fairly complex and typically involve the consideration of a number of demand, cost, and competitive factors. What makes these discrete choices particularly interesting (and challenging to analyze) is that they are interrelated with the choices of other firms because firms take into account the actions of their competitors when making their own decisions. We describe the basic problem of dealing with interrelated discrete choices in a game-theoretic framework and present the various estimation methods available. A discussion of the existing applications and future research opportunities concludes the article.