Efficient equilibrium in submodular global games of entry

We propose a global games approach to the standard two-stage entry game. The entry decisions in the first stage are strategic substitutes. The second-stage game of product market competition reflects a fundamental common value “market attractiveness” parameter, about which firms get private noisy signals. The main result establishes the selection of a unique equilibrium in the entry game, as noise vanishes, in cut-off strategies implying efficient entry. This provides a theoretical foundation for the equilibrium selection commonly used in entry models in the empirical literature. In addition, using supermodularity techniques, we provide novel conditions of independent interest on the primitives (demand and cost functions) of market competition to justify our assumptions for Bertrand and Cournot competition. These include results on the effects of entry and demand shifts and highlight the critical relevance of the property of log-supermodularity of demand.