Information Acquisition and Processing in Coordination Games

Faculty Development Competitive Research Grant Program 2021-2023

Many economic situations such as behavior of traders on a stock market or competition among firms on a product market are strategic environments: the returns to actions of an economic agent in such situations depend on other agents’ behavior. Furthermore, additional parameters of the world, not necessarily perfectly observable by an agent, influence the returns to a specific action. For example, a firm’s optimal pricing decision depends on what prices other firms charge and on the overall demand for the industry product. The large body of game theoretical literature has modelled such situations as games of incomplete information and studied their properties under given information structures. The information, however, is rarely readily available and is often costly to get. For example, firms often have a marketing department which purpose is, among other thing, to study the market and evaluate the demand for firm’s product. Thus, agents make decision on what to learn about the world and how to interpret acquired information given the costs and constraints. The questions pertaining to this dimension of the economic behavior have recently gained traction in the economics agenda. This project aims to contribute to this research agenda by advancing our understanding of the role played by constraints on information acquisition and processing in the decision-making in strategic environments. In this project I focus on specific type of strategic environments known as coordination games. The main property of coordination games is the strategic complementarity between actions of different agents: incentives to pursue a particular behavior increase with the number of other agents engaging in this behavior. For example, a firm has incentives to charge low prices when prices charged by other firms in the market are low. The strategic complementarity often leads to a multiplicity of equilibria when information is complete, therefore, studying the acquisition and processing of information in these environments is especially important for making predictions about behavior. I am going to address the role of information in the determination of the behavior in the strategic environments through the series of laboratory experiments firmly grounded in the theoretical advances in this area