nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒10‒20
fourteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  2. Approximate knowledge of rationality and correlated equilibria By Fabrizio, Germano; Peio, Zuazo Garín
  3. The Petersburg Paradox at 300 By Seidl, Christian
  4. Full Implementation of Rank Dependent Prizes By Midjord, Rune
  5. The Role of Coordination Bias in Platform Competition By Hanna Halaburda; Yaron Yehezkel
  6. Monopoly Pricing in the Presence of Social Learning By Bar Ifrach; Costis Maglaras; Marco Scarsini
  7. Auctions, Actions, and the Failure of Information Aggregation By Alp Atakan; Mehmet Ekmekci
  8. Resale in Auctions with Financial Constraints By De Frutos, María Ángeles; Espinosa Alejos, María Paz
  9. Exclusionary Pricing in a Two-Sided Market By Motta, Massimo; Vasconcelos, Helder
  10. Collaborative Learning is Better By Hélène Le Cadre; Bedo Jean-Sébastien
  11. A Theory of Choice Under Internal Conflict By Ritxar Arlegi
  12. Monotonic models and cycles By José Alvaro Rodrigues-Neto
  13. The solution of discretionary stopping problems with applications to the optimal timing of investment decisions By Timothy C. Johnson
  14. Asset price manipulation with several traders By Walther, A.

  1. By: Ori Haimanko (BGU); Atsushi Kajii (KIER, Kyoto University)
    Abstract: We relax the Kajii and Morris (1997a) notion of equilibrium ro- bustness by allowing approximate equilibria in close incomplete infor- mation games. The new notion is termed "approximate robustness". The approximately robust equilibrium correspondence turns out to be upper hemicontinuous, unlike the (exactly) robust equilibrium corre- spondence. As a corollary of the upper hemicontinuity, it is shown that approximately robust equilibria exist in all two-player zero-sum games and all two-player two-strategy games, whereas (exactly) robust equilibria may fail to exist for some games in these categories.
    Keywords: incomplete information, robustness, Bayesian Nash equi- librium, ?-equilibrium, upper hemicontinuity, zero-sum games.
    JEL: C72
    Date: 2012
  2. By: Fabrizio, Germano; Peio, Zuazo Garín
    Abstract: We extend Aumann's [3] theorem deriving correlated equilibria as a consequence of common priors and common knowledge of rationality by explicitly allowing for non-rational behavior. We replace the assumption of common knowledge of rationality with a substantially weaker notion, joint p-belief of rationality, where agents believe the other agents are rational with probabilities p = (pi)i2I or more. We show that behavior in this case constitutes a constrained correlated equilibrium of a doubled game satisfying certain p-belief constraints and characterize the topological structure of the resulting set of p-rational outcomes. We establish continuity in the parameters p and show that, for p su ciently close to one, the p-rational outcomes are close to the correlated equilibria and, with high probability, supported on strategies that survive the iterated elimination of strictly dominated strategies. Finally, we extend Aumann and Dreze's [4] theorem on rational expectations of interim types to the broader p-rational belief systems, and also discuss the case of non-common priors.
    Keywords: bounded rationality, correlated equilibrium, aproximate common knowledge, p-rational blief system, common prior, information noncooperative game
    Date: 2012–07–16
  3. By: Seidl, Christian
    Abstract: In 1713 Nicolas Bernoulli sent to de Montmort several mathematical problems, the fifth of which was at odds with the then prevailing belief that the advantage of games of hazard follows from their expected value. In spite of the infinite expected value of this game, no gambler would venture a major stake in this game. In this year, de Montmort published this problem in his Essay d'analyse sur les jeux de hazard. By dint of this book the problem became known to the mathematics profession and elicited solution proposals by Gabriel Cramer, Daniel Bernoulli (after whom it became known as the Petersburg Paradox), and Georges de Buffon. Karl Menger was the first to discover that bounded utility is a necessary and sufficient condition to warrant a finite expected value of the Petersburg Paradox. It was, in particular, Menger's article which provided an important cue for the development of expected utility by von Neumann and Morgenstern. The present paper gives a concise account of the origin of the Petersburg Paradox and its solution proposals. In its third section, it provides a rigorous analysis of the Petersburg Paradox from the uniform methodological vantage point of d'Alembert's ratio text. Moreover, it is shown that appropriate mappings of the winnings or of the probabilities can solve or regain a Petersburg Paradox, where the use of probabilities seems to have been overlooked by the profession. --
    Date: 2012
  4. By: Midjord, Rune
    Abstract: A manager/mechanism designer must allocate a set of money prizes ($1, $2, .., $n) between n agents working in a team. The agents know the state i.e. who contributed most, second most, etc. The agents' prefer- ences over prizes are state independent. We incorporate the possibility that the manager knows the state with a tiny probability and present a simple mechanism that uniquely implement prizes that respects the true state.
    Keywords: full implementation, direct mechanism, verifiable information, rank order tournaments
    JEL: D82
    Date: 2012
  5. By: Hanna Halaburda (Strategy Unit, Harvard Business School); Yaron Yehezkel (Faculty of Management, Tel-Aviv University)
    Abstract: This paper considers platform competition in a two-sided market that includes buyers and sellers. One of the platforms benefits from a favorable coordination bias in the market, in that the two sides are more likely to join the advantaged platform. We find that the degree of the coordination bias affects the platform's decision regarding the business model (i.e., whether to subsidize buyers or sellers), the access fees and the size of the platform. A slight increase in the coordination bias may induce the advantaged platform to switch from subsidizing sellers to subsidizing buyers, or induce the disadvantaged platform to switch from subsidizing buyers to subsidizing sellers. Moreover, in the former case the advantaged platform switches from oversupplying to undersupplying sellers, while in the latter case the disadvantaged platform switches from undersupplying to oversupplying sellers.
    Keywords: platform competition, two-sided markets, coordination bias
    JEL: L11 L14
    Date: 2012–08
  6. By: Bar Ifrach (Management Science and Engineering, Stanford University); Costis Maglaras (Columbia Business School, Columbia University); Marco Scarsini (Dipartimento di Economia e Finanza, LUISS)
    Abstract: A monopolist offers a product to a market of consumers with heterogeneous quality preferences. Although initially uninformed about the product quality, they learn by observing past purchase decisions and reviews of other consumers. Our goal is to analyze the social learning mechanism and its effect on the seller's pricing decision. Consumers follow an intuitive non-Bayesian decision rule and, under some conditions, eventually learn the product's quality. We show how the learning trajectory can be approximated in settings with high demand intensity via a mean-field approximation that highlights the dynamics of this learning process, its dependence on the price, and the market heterogeneity with respect to quality preferences. Two pricing policies are studied: a static price, and one with a single price change. Finally, numerical experiments suggest that pricing policies that account for social learning may increase revenues considerably relative to policies that do not.
    Keywords: learning, information aggregation, bounded rationality, pricing, optimal pricing
    JEL: D49 D83
    Date: 2012–08
  7. By: Alp Atakan; Mehmet Ekmekci
    Abstract: We study a market in which k identical and indivisible objects are allocated using a uniform-price auction where n > k bidders each demand one object. Before the auction, each bidder receives an informative but imperfect signal about the state of the world. The good that is auctioned is a common-value object for the bidders, and a bidder’s valuation for the object is determined jointly by the state of the world and an action that he chooses after winning the object but before he observes the state. We show that there are equilibria in which the auction price is completely uninformative about the state of the world and aggregates no information even in an arbitrarily large auction. In the equilibrium that we construct, because prices do not aggregate information, agents have strict incentives to acquire costly information before they participate in the market. Also, market statistics other than price, such as the amount of rationing and bid distributions contain extra information about the state. Our findings sharply contrast with past work which shows that in large auctions where there is no ex-post action, the auction price aggregates information.
    Keywords: Auctions, Large markets, Information Aggregation JEL Classification Numbers: C73, D44, D82, D83.
    Date: 2012–10–10
  8. By: De Frutos, María Ángeles; Espinosa Alejos, María Paz
    Abstract: This paper analyzes auctions where bidders face nancial constraints that may force them to resell part of the property of the good (or subcontract part of a project) at a resale market. First we show that the ine¢ cient speculative equilibria of second- price auctions (Garratt and Tröger, 2006) generalizes to situations with partial resale where only the high value bidder is nancially constrained. However, when all players face nancial constraints the ine¢ cient speculative equilibria disappear. Therefore, for auctioning big facilities or contracts where all bidders are nancially constrained and there is a resale market, the second price auction remains a simple and appropriate mechanism to achieve an e¢ cient allocation.
    Keywords: auctions, resale, financial constraints, subcontracting
    JEL: L1 D44 D82
    Date: 2012
  9. By: Motta, Massimo; Vasconcelos, Helder
    Abstract: In this paper we provide a new way of modelling two-sided markets, and we then use this model to study anti-competitive conduct in an asymmetric two-sided market which captures the main features of some recent antitrust cases. We show that below-cost pricing on one market side can allow an incumbent firm to exclude a more efficient rival which does not have a customer base yet. This exclusionary behaviour is the more likely to occur the more mature the market and the stronger the established customer base of the incumbent.
    Keywords: Demand externalities; Predation; Two-sided markets
    JEL: L11 L13 L41
    Date: 2012–10
  10. By: Hélène Le Cadre (LIMA - CEA, LIST, Laboratory of Information, Models and Learning - CEA : SACLAY); Bedo Jean-Sébastien (Orange/France-Télécom - Telecom Orange)
    Abstract: In this article, we focus on the identification of emerging economic organizations while agents are learning hidden individual sequences modeling renewable energy production and microgrid instantaneous needs in a decentralized hierarchical network. The network is made of 3 categories of agents: producers, providers and end users belonging to microgrids. In this uncertain context, providers are penalized in case where they cannot satisfy the entire demand of the associated microgrid. Identically, producers are penalized in case where they cannot deliver the quantity of energy booked by the providers. Service providers need to make efficient forecasts about the hidden individual sequences to optimize their decisions concerning the quantities of energy to book and the prices of the energy. We prove that there exists prices that provide to the producers a guarantee to avoid penalties. Additionally, under external regret minimization, collaborative learning through a grand coalition where the providers share their information and align their forecasts, enables them to minimize their average loss. As an illustration, we compare the convergence rates of the collaborative learning strategy with rates resulting from selfish learning based on external and internal regret minimization in a 2 producers, 3 providers network. The results confirm the theory: collaboration is better for the providers.
    Keywords: Distributed Learning; Regret; Algorithmic Game Theory; Coalition
    Date: 2012–07–07
  11. By: Ritxar Arlegi (Departamento de Economía-UPNA)
    Abstract: In this paper we argue, inspired by some psychological literature, that choices are the outcome of the interplay of different, potentially conflicting motivations. We propose an axiomatic approach with two motivations, which we assume to be single-peaked over a certain given dimension. We first consider the case in which motivations are given and stable, and then introduce the possibility for motivations to change. We show first that in the no-motivation change case, certain choice behaviours that appear to be inconsistent from the standard rational choice point of view may be explained in our framework as the outcome of conflicting motivations. Afterwards, in the case of motivation change, we present two psychologically-flavoured assumptions about how motivations are influenced by choices. We show that, with some additional weak assumptions of rationality, motivation change leads to a smaller range of potentially inconsistent choices and not to a larger one as one may think. In particular, conflicts between two motivations can eventually be resolved by choosing different actions and consequently a definite and final preference for an action be revealed.
    Keywords: Motivation, Pleasure, Self-Image, Conflict, Preference Reversal, Dissonance reduction.
    JEL: D01 D03
    Date: 2012
  12. By: José Alvaro Rodrigues-Neto
    Abstract: A partitional model of knowledge is monotonic if there exists a linear order on the state space such that, for every player, each element of her partition contains only a sequence of consecutive states. In monotonic models, the absence of alternating cycles is equivalent to the property that, for every pair of players, the join of their partitions contains only singletons. Under these equivalent conditions any set of posterior beliefs for the players is consistent (i.e., there is a common prior). We describe the lattice properties of monotonic models, develop a test to check if a model is monotonic, propose a simple sufficient condition for non-monotonicity, and provide some examples. We also study models having circular orders, a weakening of monotonicity.
    JEL: C02 D80 D82 D83
    Date: 2012–10
  13. By: Timothy C. Johnson
    Abstract: We present a methodology for obtaining explicit solutions to infinite time horizon optimal stopping problems involving general, one-dimensional, It\^o diffusions, payoff functions that need not be smooth and state-dependent discounting. This is done within a framework based on dynamic programming techniques employing variational inequalities and links to the probabilistic approaches employing $r$-excessive functions and martingale theory. The aim of this paper is to facilitate the the solution of a wide variety of problems, particularly in finance or economics.
    Date: 2012–10
  14. By: Walther, A.
    Abstract: In financial markets with asymmetric information, traders may have an incentive to forgo profitable deals today in order to preserve their informational advantage for future deals. This sort of manipulative behaviour has been studied in markets with one informed trader (Kyle 1985, Chakraborty and Yilmaz 2004). The effect is slower social learning. Using an extension of Glosten and Milgrom’s (1985) trading model, we study this effect in markets with N informed traders. As N grows large, each trader’s price impact subsides, and so does manipulation in equilibrium. However, the impact of manipulation on social learning can be increasing in N. As N increases, each trader individually manipulates less. But nonetheless, the increased number of manipulative actions introduces enough noise to exacerbate the impact of manipulation on learning.
    Keywords: Price manipulation, asset pricing, asymmetric information, Glosten-Milgrom model
    JEL: D80 D82 G10 G14
    Date: 2012–10–08

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