nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒07‒05
fifteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Contracts Offered by Bureaucrats By Fahad Khalil; Doyoung Kim; Jacques Lawarree
  2. Liquidity and Inefficient Investment By Oliver D. Hart; Luigi Zingales
  3. Cannibalization, Innovation and Spin-outs By James D. Campbell; April Mitchell Franco
  4. Divide and Learn: Early Contracting with Endogenous Threat By Jullien, Bruno; Pouyet, Jérôme; Sand-Zantman, Wilfried
  5. Stable Sets for Asymmetric Information Economies By Maria Gabriella Graziano; Claudia Meo; Nicholas C. Yannelis
  6. Savage Games: A Theory of Strategic Interaction with Purely Subjective Uncertainty By Grant, Simon; Meneghel, Idione; Tourky, Rabee
  7. An Adaptive Learning Model in Coordination Games By Naoki Funai
  8. The Evolutionary Robustness of Forgiveness and Cooperation By Pedro Dal Bó; Enrique R. Pujals
  9. Network Security and Contagion By Daron Acemoglu; Azarakhsh Malekian; Asuman Ozdaglar
  10. Volume of Trade and Dynamic Network Formation in Two-Sided Economies By Roland Pongou; Roberto Serrano
  11. One-stop shopping as a cause of slotting fees: A rent-shifting mechanism By Caprice, Stéphane; von Schlippenbach, Vanessa
  12. Conundrums for Nonconsequentialists By John A Weymark
  13. Efficient Upgrading in Network Goods : Is Commitment Always Good? By Athanasopoulos, Thanos
  14. Organizational Structure and the Choice of Price vs. Quantity in a Mixed Duopoly By Alessandra Chirco; Caterina Colombo; Marcella Scrimitore
  15. Input price discrimination (bans), entry and welfare By Dertwinkel-Kalt, Markus; Haucap, Justus; Wey, Christian

  1. By: Fahad Khalil; Doyoung Kim; Jacques Lawarree
    Date: 2013–06
  2. By: Oliver D. Hart; Luigi Zingales
    Abstract: We study the role of fiscal policy in a complete markets model where the only friction is the nonpledgeability of human capital. We show that the competitive equilibrium is constrained inefficient, leading to too little risky investment. We also show that fiscal policy following a large negative shock can increase ex ante welfare. Finally, we show that if the government cannot commit to the promised level of fiscal intervention, the ex post optimal fiscal policy will be too small from an ex ante perspective.
    JEL: E41 E51 G21
    Date: 2013–06
  3. By: James D. Campbell; April Mitchell Franco
    Abstract: When an idea for a new product arrives, will it be developed and by whom? We develop a spatial model in which an idea arrives to a researcher within the firm. Products are imperfectly substitutable, so that developing a new product that is close to an existing product will cannibalize some amount of the existing product's sales, and the cost to develop a new product is higher the further it is from an existing product. Together these forces mean that there exist ideas that can be developed more efficiently by the researcher as a spin-out than by the firm (due to the cost of fit) but that the firm prefers to buy out the researcher and either develop itself or discard (due to the potential loss from cannibalization). These inefficient outcomes occur for ideas at intermediate distance from the firm's existing portfolio, and are likelier and more severe the higher is demand and the greater the degree of substitutability.
    Keywords: -
    Date: 2013
  4. By: Jullien, Bruno; Pouyet, Jérôme; Sand-Zantman, Wilfried
    Abstract: An economic agent may engage into an early negotiation with the sole pur- pose of gathering information to improve his bargaining position. We analyze this issue in the context of a buyer/seller relationship, where the seller has private information on the future gains from trade, and the buyer can bypass at some preliminary stage. While both players can wait until uncertainty is resolved and trade eciently ex-post, we show that the buyer may be better off by proposing an early contract. This early contract uses the sellers' pri- vate information to divide types in a way that makes costly bypass a credible threat. While some types of seller accept the contract because they gain more than in the status quo situation, other types only accept for fear that rejection would reveal too much information. We derive the whole set of equilibrium payoffs of this game, and study extensions to fit various economic situations.
    Date: 2013–05
  5. By: Maria Gabriella Graziano (Università di Napoli Federico II and CSEF); Claudia Meo (Università di Napoli Federico II); Nicholas C. Yannelis (University of Iowa and University of Manchester)
    Abstract: An exchange economy with asymmetrically  informed agents is considered with an exogenous rule that regulates  the information sharing among agents. For it, the notion of stable  sets à la Von Neumann and Morgenstern is analyzed. Two different  frameworks are taken into account as regards preferences: a model  without expectations and a model with expected utility. For the first  one, it is shown that the set $V$ of all individually rational, Pareto  optimal, symmetric allocations is the unique stable set of symmetric  allocations. For the second one, an example is presented which shows  that the same set $V$ is not externally stable and a weaker result is  proved. Finally, the coalitional incentive compatibility of  allocations belonging to the unique stable set is provided.
    Keywords: sets, asymmetric information, information sharing
    JEL: C71 D51 D82
    Date: 2013–06–25
  6. By: Grant, Simon; Meneghel, Idione; Tourky, Rabee
    Abstract: Abstract. We define and discuss Savage games, which are ordinal games that are set in L. J. Savage’s framework of purely subjective uncertainty. Every Bayesian game is ordinally equivalent to a Savage game. However, Savage games are free of priors, prob- abilities and payoffs. Players’ information and subjective attitudes toward uncertainty are encoded in the state-dependent preferences over state contingent action profiles. In the games we study player preferences satisfy versions of Savage’s sure thing principle and small event continuity postulate. An axiomatic innovation is a strategic analog of Savage’s null events. We prove the existence of equilibrium in Savage games. This result eschews any notion of objective randomization, convexity, and monotonicity. Applying it to games with payoffs we show that our assumptions are satisfied by a wide range of decision-theoretic models. In this regard, Savage games afford a tractable framework to study attitudes towards uncertainty in a strategic setting. We illustrate our results on the existence of equilibrium by means of examples of games in which players have expected and non-expected utility.
    Keywords: Bayesian games, multiple priors, non-expected utility, subjective uncer- tainty, existence of equilibrium, decomposable sets., Risk and Uncertainty, D81, C7,
    Date: 2013–06
  7. By: Naoki Funai
    Abstract: In this paper, we provide a theoretical prediction of the way in which adaptive players behave in the long run in games with strict Nash equilibria. In the model, each player picks the action which has the highest assessment, which is a weighted average of past payoffs. Each player updates his assessment of the chosen action in an adaptive manner. Almost sure convergence to a Nash equilibrium is shown under one of the following conditions: (i) that, at any non-Nash equilbrium action profile, there exists a player who can find another action which gives always better payoffs than his current payoff, (ii) that all non-Nash equilibrium action profiles give the same payoff. We show almost sure convergence to a Nash equilibrium in the following games: pure coordination games; the battle of the sexes games; the stag hunt game; and the first order static game. In the game of chicken and market entry games, players may end up playing a maximum action profile.
    Keywords: Adaptive Learning, Coordination Games
    JEL: C72 D83
    Date: 2013–06
  8. By: Pedro Dal Bó; Enrique R. Pujals
    Abstract: We study the evolutionary robustness of strategies in innitely repeated prisoners' dilemma games in which players make mistakes with a small probability and are patient. The evolutionary process we consider is given by the replicator dynamics. We show that there are strategies with a uniformly large basin of attraction independent of the size of the population. Moreover, we show that those strategies forgive defections and, assuming that they are symmetric, they cooperate. We provide partial eciency results for asymmetric strategies.
    Keywords: #
    Date: 2013
  9. By: Daron Acemoglu; Azarakhsh Malekian; Asuman Ozdaglar
    Abstract: We develop a theoretical model of security investments in a network of interconnected agents. Network connections introduce the possibility of cascading failures due to an exogenous or endogenous attack depending on the profile of security investments by the agents. The general presumption in the literature, based on intuitive arguments or analysis of symmetric networks, is that because security investments create positive externalities on other agents, there will be underinvestment in security. We show that this reasoning is incomplete because of a first-order economic force: security investments are also strategic substitutes. In a general (non-symmetric) network, this implies that underinvestment by some agents will encourage overinvestment by others. We demonstrate by means of examples that there can be overinvestment by some agents and also that aggregate probabilities of infection can be lower in equilibrium compared to the social optimum. We then provide sufficient conditions for underinvestment. This requires both sufficiently convex cost functions (convexity alone is not enough) and networks that are either symmetric or locally tree-like. We also characterize the impact of network structure on equilibrium and optimal investments. Finally, we show that when the attack location is endogenized (by assuming that the attacker chooses a probability distribution over the location of the attack in order to maximize damage), there is an additional incentive for overinvestment: greater investment by an agent shifts the attack to other parts of the network.
    JEL: D6 D62
    Date: 2013–06
  10. By: Roland Pongou; Roberto Serrano
    Abstract: We study the long-run stability of trade networks in a two-sided economy of agents labelled men and women. Each agent desires relationships with the other type, but having multiple partners is costly. This cost-bene?t trade-o¤ results in each agent having a single-peaked utility over the number of partners?the volume of trade?, the peak being greater for men than for women. We propose a stochastic matching process in which self-interested agents form and sever links over time. Links can be added or deleted, sometimes simultaneously by a single agent. While the unperturbed process yields each pairwise stable network as an absorbing state, stochastic stability in two perturbed processes provides a signi?cant re?nement, leading respectively to egalitarian and anti-egalitarian pairwise stable networks. This has implications for the concentration on each side of the market of a random information shock. The analysis captures stylized facts, related to market fragmentation, concentration and contagion asymmetry, in several two-sided economies.
    Keywords: Two-sided networks, pairwise stability, stochastic stability, herd externality, informational cascade, fragmentation, concentration, economy thinness, contagion asymmetry.
    Date: 2013
  11. By: Caprice, Stéphane; von Schlippenbach, Vanessa
    Abstract: Consumers increasingly prefer to bundle their purchases into a single shopping trip, inducing complementaries between initially independent or substitutable goods. Taking this one-stop shopping behavior into account, we show that slotting fees may emerge as a result of a rent-shifting mechanism in a three-party negotiation framework, where a monopolistic retailer negotiates sequentially with two suppliers about two-part tariff contracts. If the goods are initially independent or sufficiently differentiated, the wholesale price negotiated with the first supplier is upward distorted. This allows the retailer and the first supplier to extract rent from the second supplier. To compensate the retailer for the higher wholesale price, the first supplier pays a slotting fee as long as its bargaining power vis-à-vis the retailer is not too large. --
    Keywords: One-stop shopping,rent-shifting,slotting fees
    JEL: L22 L42
    Date: 2013
  12. By: John A Weymark (Vanderbilt University)
    Abstract: There are a number of single-profile impossibility theorems in social choice theory and welfare economics that demonstrate the incompatibility of dominance criteria with various nonconsequentialist principles given some rationality restrictions on the rankings being considered. This article is concerned with examining what they have in common and how they differ. Groups of results are identified that have similar formal structures and are established using similar proof strategies.
    Keywords: consequentialism, welfarism, social choice, welfare economics
    JEL: D6 D7
    Date: 2013–06–26
  13. By: Athanasopoulos, Thanos (Department of Economics, University of Warwick,)
    Abstract: The frequency of upgrades in technology markets is not socially optimal when the quality improvement is negligible and smaller than the adoption cost of the new product. In monopolies, the literature has identified a sufficient factor for efficient upgrading: the firm’s power to commit to whether it will upgrade or not in the future. This is not true when an entry threat applies. In fact, it could even be that commitment is a factor of inefficiency when the market is open to competition. As shown in this paper, the incumbent’s commitment adds an additional source of inefficiency while an entry threat could dissolve social optimality.
  14. By: Alessandra Chirco (Dipartimento di Scienze dell’Economia, Università del Salento, Italy); Caterina Colombo (Dipartimento di Economia e Management, Università di Ferrara, Italy); Marcella Scrimitore (Dipartimento di Scienze dell’Economia, Università del Salento, Italy; The Rimini Centre for Economic Analysis, Italy)
    Abstract: We consider the choice of price/quantity by a public and a private firm in a mixed differentiated duopoly. First, we study the way in which the strategic choice of the market variable is affected by different given organizational structures (managerial or entrepreneurial) of the public and the private firm. Second, we investigate how the price/quantity choice interacts with the endogenous choice of the organizational structure, thus determining a subgame perfect equilibrium at which firms choose to behave as price-setters and to adopt a managerial structure.
    Keywords: mixed duopoly; strategic delegation; price competition; quantity competition
    JEL: D43 L22 L32
    Date: 2013–05
  15. By: Dertwinkel-Kalt, Markus; Haucap, Justus; Wey, Christian
    Abstract: Katz (1987), DeGraba (1990), and Yoshida (2000) have formulated theories that price discrimination bans in intermediary goods markets tend to have positive effects on allocative, dynamic and productive efficiency, respectively. We show that none of these results is robust vis-à-vis endogenous changes in downstream market structure. An upstream monopolist's ability to price discriminate can intensify competition through entry (by a technically inefficient entrant), resulting in socially preferable market outcomes. In contrast, discrimination bans tend to blockade entry of relatively inefficient firms , thereby strengthening downstream market concentration. --
    JEL: L13 D43 K31
    Date: 2013

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