nep-gth New Economics Papers
on Game Theory
Issue of 2013‒10‒05
fifteen papers chosen by
Laszlo A. Koczy
Hungarian Academy of Sciences and Obuda University

  1. Self-Serving Use of Equity Rules in Bargaining with Asymmetric Outside Options By Hennig-Schmidt, Heike; Irlenbusch, Bernd; Rilke, Rainer Michael; Walkowitz, Gari
  3. Paths to Stability in the Assignment Problem By Bettina Klaus; Frédéric Payot
  4. Trust in Cohesive Communities By Felipe Balmaceda; Juan Escobar
  5. Approximate variational inference for a model of social interactions By Angelo Mele
  6. My Friend Far Far Away: Asymptotic Properties of Pairwise Stable Networks By Vincent BOUCHER; Ismael MOURIFIÉ
  7. Strategic Determination of Renegotiation Costs By Akitoshi Muramoto
  8. Targeted information release in social networks By Junjie Zhou; Ying-Ju Chen;
  9. Competing for Influencers in a Social Network By Zsolt Katona
  10. Game of Platforms: Strategic Expansion in Two-Sided Markets By Sagit Bar-Gill
  11. Unstructured Bargaining over an Endogenously Produced Surplus and Fairness Ideals – An Experiment By Andreas Orland; Michael W.M. Roos
  12. Information Aggregation Through Stock Prices and the Cost of Capital By Olga Gorelkina; Wolfgang Kuhle
  13. Cheap Talk with Outside Options By Saori Chiba; Kaiwen Leong; Kaiwen Leong
  14. Tacit Coordination in Games with Third-Party Externalities By James Bland; Nikos Nikiforakis
  15. Common Agency and Coordinated Bids in Sponsored Search Auctions By Francesco Decarolis; Maris Goldmanis; Antonio Penta

  1. By: Hennig-Schmidt, Heike (University of Bonn); Irlenbusch, Bernd (University of Cologne); Rilke, Rainer Michael (University of Cologne); Walkowitz, Gari (University of Cologne)
    Abstract: We experimentally investigate multiple notions of equity in ultimatum bargaining with asymmetric outside options. Building on the generalized equity principle formulated by Selten (1978), we derive three different equity rules that can explain 43% of all offers. Our within-subject design further allows us to show that proposers use different equity rules and apply them in a self-serving manner. They tend to follow the rules that suggest the highest payoff for them. Responders exhibit a similar pattern of behavior. Combined, these tendencies lead to high inefficiencies due to frequent rejections.
    Keywords: Outside Options, Equity Principle, Ultimatum Game
    JEL: C71 C72 C78 C91 D63
    Date: 2013–09
  2. By: Marc HENRY; Ismael MOURIFIÉ
    Abstract: We derive the empirical content of Nash equilibrium in 2×2 games of perfect information, including duopoly entry and coordination games. The derived bounds are nonparametric intersection bounds and are simple enough to lend themselves to existing inference methods. Implications of pure strategy Nash equilibrium and of exclusion restrictions are also derived. Without further assumptions, the hypothesis of Nash equilibrium play is not falsifiable. However, nontrivial bounds hold for the extent of potential monopoly advantage or free riding incentives.
    Keywords: participation games, partial identification, intersection bounds
    JEL: C25 C72 D43
    Date: 2013–10–01
  3. By: Bettina Klaus; Frédéric Payot
    Abstract: We study a labor market with finitely many heterogeneous workers and firms to illustrate the decentralized (myopic) blocking dynamics in two-sided one-to-one matching markets with continuous side payments (assignment problems, Shapley and Shubik, 1971). A labor market is unstable if there is at least one blocking pair, that is, a worker and a firm who would prefer to be matched to each other in order to obtain higher payoffs than the payoffs they obtain by being matched to their current partners. A blocking path is a sequence of outcomes (specifying matchings and payoffs) such that each outcome is obtained from the previous one by satisfying a blocking pair (i.e., by matching the two blocking agents and assigning new payoffs to them that are higher than the ones they received before). We are interested in the question if starting from any (unstable) outcome, there always exists a blocking path that will lead to a stable outcome. In contrast to discrete versions of the model (i.e., for marriage markets, one-to-one matching, or discretized assignment problems), the existence of blocking paths to stability cannot always be guaranteed. We identify a necessary and sufficient condition for an assignment problem (the existence of a stable outcome such that all matched agents receive positive payoffs) to guarantee the existence of paths to stability and show how to construct such a path whenever this is possible.
    Keywords: Assignment problem; competitive equilibria; core; decentralized market; random path; stability
    JEL: C71 C78 D63
    Date: 2013–09
  4. By: Felipe Balmaceda (Facultad de Economía y Empresa, Universidad Diego Portales); Juan Escobar (Departamento de Ingenieria Industrial, Universidad de Chile)
    Abstract: This paper investigates the social structures that maximize trust and cooperation when agreements are implicitly enforced. We study a repeated trust game in which the social network determines the information transmission technology. We show that cohesive communities, modeled as social networks of complete components, emerge as the optimal community design. Cohesive communities generate some degree of common knowledge of transpired play that allows players to coordinate their punishments and, as a result, yield relatively high equilibrium payos. Our results provide an economic rationale for the commonly argued optimality of cohesive social networks.
    Date: 2013–06
  5. By: Angelo Mele (Johns Hopkins University - Carey Business School)
    Abstract: This paper proposes approximate variational inference methods for estimation of a strategic model of social interactions. Players interact in an exogenous network and sequentially choose a binary action. The utility of an action is a function of the choices of neighbors in the network. I prove that the interaction process can be represented as a potential game and it converges to a unique stationary equilibrium distribution. However, exact inference for this model is infeasible because of a computationally intractable likelihood, which cannot be evaluated even when there are few players. To overcome this problem, I propose variational approximations for the likelihood that allow approximate inference. This technique can be applied to any discrete exponential family, and therefore it is a general tool for inference in models with a large number of players. The methodology is illustrated with several simulated datasets and compared with MCMC methods.
    Keywords: Variational approximations, Bayesian Estimation, Social Interactions
    JEL: D85 C13 C73
    Date: 2013–09
  6. By: Vincent BOUCHER; Ismael MOURIFIÉ
    Abstract: We explore the asymptotic properties of pairwise stables networks (Jackson and Wolinsky, 1996). Specifically, we want to recover a set of parameters from the individuals' utility functions using the observation of a single pairwise stable network. We develop Pseudo Maximum Likelihood estimator and show that it is consistent and asymptotically normally distributed under a very weak version of homophily. The approach is compelling as it provides explicit, easy-to-check conditions on the admissible set of preferences. Moreover, the method is easily implementable using pre-programmed estimators available in most statistical packages. We provide an application of our method using the Add Health database.
    Keywords: social network, pairwise stability, spatial econometrics
    JEL: C13 D85
    Date: 2013–10–01
  7. By: Akitoshi Muramoto (Graduate School of Economics, Kyoto University)
    Abstract: Recently, some literature on incomplete contracts studies the cases where renegotiations take place inefficiently. We extend the incomplete contract model in Hart (2009) by assuming that one party chooses an action which affects renegotiation costs. In our model, renegotiation costs are determined endogenously. We characterize the condition that she can get higher payoff by manipulating renegotiation costs than when she cannot manipulate renegotiation costs and renegotiations take place efficiently. Whereas she chooses positive renegotiation costs, renegotiations never occur on the equilibrium paths. They work just as "credible threat". Her equilibrium share ratio of the ex ante bargaining surplus is higher than her bargaining power. As an application, we discuss an investment problem by using a variant of our basic model. We show that the agents mitigate the investment problem by setting some positive renegotiation costs and increasing a high skilled agent's share ratio of the ex ante bargaining surplus to give her larger incentive of investment.
    JEL: D23 D86 C78
    Date: 2013–09
  8. By: Junjie Zhou (School of International Business Administration, Shanghai University of Finance and Economics); Ying-Ju Chen (University of California at Berkeley);
    Abstract: As a common practice, various firms initially make information and access to their products/services scarce within a social network; identifying influential players that facilitate information dissemination emerges as a pivotal step for their success. In this paper, we tackle this problem using a stylized model that features payoff externalities and local network effects, and the network designer is allowed to release information to only a subset of players (leaders); these targeted players make their contributions first and the rest followers move subsequently after observing the leaders' decisions. In the presence of incomplete information, the signaling incentive drives the optimal selection of leaders and can lead to a first-order materialistic effect on the equilibrium outcomes. We propose a novel index for the key leader selection (i.e., a single player to provide information to) that can be substantially different from the key player index in \ \cite{ballester2006s} and the key leader index with complete information proposed in \cite{zhou13benefit}. We also show that in undirected graphs, the optimal leader group identified in \cite{zhou13benefit} is exactly the optimal follower group when signaling is present. The pecking order in complete graphs suggests that the leader should be selected by the ascending order of intrinsic valuations. We also examine the out-tree hierarchical structure that describes a typical economic organization. The key leader turns out to be the one that stays in the middle, and it is not necessarily exactly the central player in the network.
    Keywords: social network, signaling, information management, targeted advertising, game theory
    JEL: D21 D29 D82
    Date: 2013–09
  9. By: Zsolt Katona (Haas School of Business, UC Berkeley)
    Abstract: This paper studies the competition between firms for influencers in a network. Firms spend effort to convince influencers to recommend their products. The analysis identifies the offensive and defensive roles of spending on influencers. The value of an influencer only depends on the in-degree distribution of the influence network. Influencers who exclusively cover a high number of consumers are more valuable to firms than those who mostly cover consumers also covered by other influencers. Firm profits are highest when there are many consumers with a very low or with very high in-degree. Consumers with an intermediate level of in-degree contribute negatively to profits and high in-degree consumers increase profits when market competition is not intense. Prices are generally lower when consumers are covered by many influencers, however, firms are not always worse off with lower prices. The nature of consumer response to recommendations makes an important difference. When first impressions dominate, firm profits for dense networks are higher, but when recommendations have a cumulative influence profits are reduced as the network becomes dense.
    Keywords: Social Networks, Influencers, Competition
    JEL: M31 C72 D44
    Date: 2013–09
  10. By: Sagit Bar-Gill (Tel Aviv University)
    Abstract: Online platforms, such as Google, Facebook, or Amazon, are constantly expanding their activities, while increasing the overlap in their service offering. In this paper, we study the scope and overlap of online platforms' activities, when they are endogenously determined. We model an expansion game between two online platforms offering two different services to users for free, while selling user clicks to advertisers. At the outset, each platform offers one service, and users may subscribe to one platform or both (multihoming). In the second stage, each platform decides whether to expand by adding the service already offered by its rival. Platforms' expansion decisions affect users' mobility, and thus the partition of users in the market, which, in turn, affects platform prices and profits. We analyze the equilibrium of the expansion game, demonstrating that, in equilibrium, platforms may decide not to expand, even though expansion is costless. Such strategic "no expansion" decisions are due to quantity and price effects of changes in user mobility, brought on by expansion. Both symmetric expansion and symmetric no-expansion equilibria may arise, as well as asymmetric expansion equilibria, even for initially symmetric platforms.
    Keywords: Two-sided markets, Platforms, Entry, Online advertising
    JEL: L11 L13 L14
    Date: 2013–09
  11. By: Andreas Orland; Michael W.M. Roos
    Abstract: Fairness considerations are important determinants of behavior in unstructured bargaining situations with equal bargaining power. If the surplus over which the bargaining takes place was created by separate, individual efforts, several entitlement-related fairness ideals might be relevant. In our experiment we first elicit subjects’ fairness ideals using a questionnaire. In the following production phase each player generates output by luck, individual effort and talent. We analyze whether the elicited fairness ideals guide subjects’ behavior in the subsequent bargaining in which the joint output is distributed among two individuals. We find that bargaining claims deviate significantly from the elicited fairness ideals and are strongly related to performance if one individual had produced more than the partner. These findings contrast the previous literature on fairness ideals and enrich the findings on self-serving fairness.
    Keywords: Fairness; unstructured bargaining; self-serving fairness; opportunism
    JEL: C91 D39 D63
    Date: 2013–08
  12. By: Olga Gorelkina (Max Planck Institute for Research on Collective Goods, Bonn); Wolfgang Kuhle (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This paper studies a firm’s optimal capital structure in an environment, where the firm’s stock price serves as a public signal for its credit worthiness. In equilibrium, equity investors choose how much information to acquire privately, which induces a positive relation between the amount of equity issued and the stock price signal’s precision. Thus, through its capital structure, the firm can internalize the informational externality that stock prices exert on bond yields. Firms with a strong fundamental therefore issue more equity and less debt than they would if the informational spill-over did not exist.
    Keywords: Information Aggregation, capital structure, Sequential Markets, Market Depth
    JEL: G32 D83 C73 G10
    Date: 2013–10
  13. By: Saori Chiba (Dept. of Management, Università Ca' Foscari Venice); Kaiwen Leong; Kaiwen Leong (Division of Economics, Nanyang Technological University)
    Abstract: In Crawford and Sobel (1982) (CS), a sender (S) uses cheap talk to persuade a receiver (R) to select an action as profitable to S as possible. This paper shows that the presence of an outside option Ð that is, allowing R to avoid taking any action, yielding state-independent reservation utilities to R and S Ð has an important qualitative impact on the results. Contrary to CS, in this model, the informativeness of communication is not always decreasing in the level of conflict of interest. Relatedly, communication can be more informative than in CS.
    Keywords: Cheap Talk, Information Transmission, Experts
    JEL: D82 D83
    Date: 2013–09
  14. By: James Bland (Department of Economics, Purdue University); Nikos Nikiforakis (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: When agents face coordination problems their choices often impose externalities on third parties. We investigate whether such externalities can affect equilibrium selection in a series of one-shot coordination games varying the size and the sign of the externality. We fi?nd that third-party externalities have a limited effect on decisions. A large majority of participants in the experiment are willing to take an action that increases their income slightly, even if doing so causes substantial inequalities and reductions in overall efficiency. Individuals revealed to be other-regarding in a non-strategic allocation task often behave as-if sel?fish when trying to coordinate.
    Keywords: social preferences, efficiency, externalities, tacit coordination, equilibrium selection, efficiency.
    JEL: D63 D01 D62 C90 D03
    Date: 2013–10
  15. By: Francesco Decarolis (Department of Economics and Hariri Institute, Boston University); Maris Goldmanis (Department of Economics, Royal Holloway, University of London); Antonio Penta (Department of Economics, University of Wisconsin at Madison)
    Abstract: As auctions are becoming the main mechanism for selling advertisement space on the web, marketing agencies specialized in bidding in online auctions are proliferating. We analyze theoretically how bidding delegation to a common marketing agency can undermine both revenues and efficiency of the generalized second price auction, the format used by Google and Microsoft-Yahoo!. Our characterization allows us to quantify the revenue losses relative to both the case of full competition and the case of agency bidding under an alternative auction format (specifically, the VCG mechanism). We propose a simple algorithm that a search engine can use to reduce efficiency and revenue losses.
    Keywords: Online Advertising, Internet Auctions, Common Agency
    JEL: C71 D44 L41 L81 M37
    Date: 2013–09

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