nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒04‒29
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. The Limits of Price Discrimination By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  2. Optimal Delegated Search with Adverse Selection and Moral Hazard By Ulbricht, Robert
  3. Investment and Competitive Matching By Georg Noldeke; Larry Samuelson
  4. On Competitive Nonlinear Pricing By Andrea Attar; Thomas Mariotti; François Salanié
  5. Playing 'Hard to Get': An Economic Rationale for Crowding Out of Intrinsically Motivated Behavior By Schnedler, Wendelin; Vanberg, Christoph
  6. Uncertain Information Structures and Backward Induction By Zuazo Gain, Peio
  7. Large and Small Sellers: A Theory of Equilibrium Price Dispersion with Sequential Search By Menzio, Guido; Trachter, Nicholas
  8. Competition and the Hold‐U p Problem: a Setting with Non‐exclusive Contracts By Roig, Guillem
  9. Ex-Post Equilibrium in Frictional Markets By Seungjin Han
  10. Securely Implementable Social Choice Rules with Partially Honest Agents By Alejandro Saporiti
  11. Informative Advertisement of Partial Compatible Products By Roig, Guillem
  12. General Equilibrium with Endogenous Trading Constraints By Cea-Echenique, Sebastián; Torres-Martínez, Juan Pablo
  13. A full characterization of all deterministic dominant strategy incentive compatible, ex-post individually rational, and ex-post budget balanced direct mechanisms in the public good provision problem with independent private values By Christoph Kuzmics
  14. What Determines Market Structure? An Explanation from Cooperative Investment with Non‐Exclusive Co By Roig, Guillem
  15. Participation in Fraudulent Elections By Dmitriy Vorobyev
  16. Confidence, Pessimism and their Impact on Product Differentiation in a Hotelling Model with Demand Location Uncertainty By Kauffeldt, Florian; Wiesenfarth, Boris
  17. A theory of price adjustment under loss aversion By Ahrens, Steffen; Pirschel, Inske; Snower, Dennis J.

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, Princeton University); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: We analyze the welfare consequences of a monopolist having additional information about consumers' tastes, beyond the prior distribution; the additional information can be used to charge different prices to different segments of the market, i.e., carry out "third degree price discrimination." We show that the segmentation and pricing induced by the additional information can achieve every combination of consumer and producer surplus such that: (i) consumer surplus is non-negative, (ii) producer surplus is at least as high as profits under the uniform monopoly price, and (iii) total surplus does not exceed the surplus generated by efficient trade.
    Keywords: First degree price discrimination, Second degree price discrimination, Third degree price discrimination, Private information, Privacy, Bayes correlated equilibrium, Concavification
    JEL: C72 D82 D83
    Date: 2013–05
  2. By: Ulbricht, Robert
    Abstract: The paper studies a model of delegated search. The distribution of search revenues is unknown to the principal and has to be elicited from the agent in order to design the optimal search policy. At the same time, the search process is unobservable, requiring search to be self-enforcing. The two information asymmetries are mutually enforcing each other; if one is relaxed, delegated search is efficient. With both asymmetries prevailing simultaneously, search is almost surely inefficient (it is stopped too early). Second-best remuneration is shown to optimally utilize a menu of simple bonus contracts. In contrast to standard adverse selection problems, indirect nonlinear tarifs are strictly dominated.
    Keywords: adverse selection, bonus contracts, delegated search, moral hazard, optimal stopping.
    JEL: C72 D82 D83 D86
    Date: 2014–03–11
  3. By: Georg Noldeke (Faculty of Business and Economics, University of Basel); Larry Samuelson (Cowles Foundation, Yale University)
    Abstract: We study markets in which agents first make investments and then match into potentially productive partnerships. Equilibrium investments and the equilibrium matching will be efficient if agents can simultaneously negotiate investments and matches, but we focus on markets in which agents must first sink their investments before matching. In this sunk-investment setting additional equilibria may arise, exhibiting inefficiencies that we can interpret as coordination failures. All allocations satisfying a constrained efficiency property are equilibria, and the converse holds if preferences satisfy a separability condition. We identify sufficient conditions (most notably, quasiconcave utilities) for the investments of matched agents to satisfy an exchange efficiency property as well as sufficient conditions (most notably, a single-crossing property) for agents to be matched positive assortatively, with these conditions then forming the core of sufficient conditions for the efficiency of equilibrium allocations. Our analysis unifies and extends existing studies of investments in competitive matching markets.
    Keywords: Matching, Investment, Coordination failure, Positive assortative matching, Efficiency
    JEL: C7 D5
    Date: 2014–04
  4. By: Andrea Attar (Toulouse School of Economics); Thomas Mariotti (Toulouse School of Economics); François Salanié (Toulouse School of Economics)
    Abstract: Many financial markets rely on a discriminatory limit-order book to balance supply and demand. We study these markets in a static model in which uninformed market makers compete in nonlinear tariffs to trade with an informed insider, as in Glosten (1994), Biais, Martimort, and Rochet (2000), and Back and Baruch (2013). We analyze the case where tariffs are unconstrained and the case where tariffs are restricted to be convex. In both cases, we show that pure-strategy equilibrium tariffs must be linear and, moreover, that such equilibria only exist under exceptional circumstances. These results stand in stark contrast with those obtained so far in the literature, reflecting different assumptions about the richness of the insider's information.
    Keywords: Adverse Selection, Competing Mechanisms, Limit-Order Book
    JEL: D43 D82 D86
    Date: 2014–04–18
  5. By: Schnedler, Wendelin (University of Paderborn); Vanberg, Christoph (Alfred-Weber-Institut für Wirtschaftswissenschaften, Universität Heidelberg)
    Abstract: Anecdotal, empirical, and experimental evidence suggests that offering extrinsic rewards for certain activities can reduce people's willingness to engage in those activities voluntarily. We propose a simple rationale for this 'crowding out' phenomenon, using standard economic arguments. The central idea is that the potential to earn rewards in return for an activity may create incentives to play 'hard to get' in an effort to increase those rewards. We discuss two specific contexts in which such incentives arise. In the first, refraining from the activity causes others to attach higher value to it because it becomes scarce. In the second, restraint serves to conceal the actor's intrinsic motivation. In both cases, not engaging in the activity causes others to offer larger rewards. Our theory yields the testable prediction that such effects are likely to occur when a motivated actor enjoys a sufficient degree of 'market power.'
    Keywords: intrinsic motivation, crowding out, behavioral economics, market power, hidden information
    JEL: D1 M5 D8 D4 C9
    Date: 2014–04
  6. By: Zuazo Gain, Peio
    Abstract: In everyday economic interactions, it is not clear whether sequential choices are visible or not to other participants: agents might be deluded about opponents'capacity to acquire,interpret or keep track of data, or might simply unexpectedly forget what they previously observed (but not chose). Following this idea, this paper drops the assumption that the information structure of extensive-form games is commonly known; that is, it introduces uncertainty into players' capacity to observe each others' past choices. Using this approach, our main result provides the following epistemic characterisation: if players (i) are rational,(ii) have strong belief in both opponents' rationality and opponents' capacity to observe others' choices, and (iii) have common belief in both opponents' future rationality and op-ponents' future capacity to observe others' choices, then the backward induction outcome obtains. Consequently, we do not require perfect information, and players observing each others' choices is often irrelevant from a strategic point of view. The analysis extends {from generic games with perfect information to games with not necessarily perfect information{the work by Battigalli and Siniscalchi (2002) and Perea (2014), who provide different sufficient epistemic conditions for the backward induction outcome.
    Keywords: perfect information, incomplete information, backward induction, rationality, strong belief, common belief
    JEL: C72 D82 D83
    Date: 2014–03–25
  7. By: Menzio, Guido (University of Pennsylvania and NBER); Trachter, Nicholas (Federal Reserve Bank of Richmond)
    Abstract: The paper studies equilibrium pricing in a product market for an indivisible good where buyers search for sellers. Buyers search sequentially for sellers but do not meet every seller with the same probability. Specifically, a fraction of the buyers' meetings lead to one particular large seller, while the remaining meetings lead to one of a continuum of small sellers. In this environment, the small sellers would like to set a price that makes the buyers indifferent between purchasing the good and searching for another seller. The large seller would like to price the small sellers out of the market by posting a price that is low enough to induce buyers not to purchase from the small sellers. These incentives give rise to a game of cat and mouse, whose only equilibrium involves mixed strategies for both the large and the small sellers. The fact that the small sellers play mixed strategies implies that there is price dispersion. The fact that the large seller plays mixed strategies implies that prices and allocations vary over time. We show that the fraction of the gains from trade accruing to the buyers is positive and nonmonotonic in the degree of market power of the large seller. As long as the large seller has some positive but incomplete market power, the fraction of the gains from trade accruing to the buyers depends in a natural way on the extent of search frictions.
    Keywords: Imperfect competition; Search frictions; Price dispersion
    JEL: D21 D43
    Date: 2014–03–15
  8. By: Roig, Guillem
    Abstract: This work studies how the introduction of competition to the side of the market offering trading contracts affects the equilibrium investment profile in a bilateral investment game. By using a common agency framework, where contracts are not exclusive, we find that the equilibrium investment profile depends on the competitiveness of the equilibrium outcome. Full efficiency can only be implemented when the trading outcome is the most competitive. Moreover, lowering the outcome competitiveness is not always Pareto dominant for the parties offering the contracts, and larger social welfare can be obtained with low competitive equilibria.
    Keywords: bilateral investment; hold-up; competition; Pareto dominance; social surplus.
    JEL: D44 L11
    Date: 2014–03–26
  9. By: Seungjin Han
    Abstract: This paper studies competition among multiple sellers in frictional markets. Ex-post equilibrium is tractable in terms of market information revelation. Applying the sufficient condition for equilibrium robustness (with respect to a seller's deviation to any arbitrary selling mechanism) to ex-post equilibrium yields comparative statics on the distribution of trading prices and profits.
    Keywords: ex-post equilibrium, market frictions, robust equilibrium, comparative statics, competing mechanism desgin
    JEL: C71 D82
    Date: 2014–04
  10. By: Alejandro Saporiti
    Date: 2014
  11. By: Roig, Guillem
    Abstract: Product design and advertisement strategy have been theoretically studied as separate firms decisions. In the present paper, we look at the link between advertisement and product design and we analyze how firms' advertising decisions influence the market effect of product design. We consider a model of informative advertisement where two firms produce a bundle of complementary products which are partially compatible. A product design with more compatible components is associated with a larger intensity of advertisement. Higher compatibility reduces competition between firms, which incentivizes them to give factual information about their bundle. Like Matutes and Regibeau (1988), industry profit and total welfare is maximized with full product compatibility. However, contrary to them, we obtain that consumer surplus is not monotone with the level of product compatibility and its maximum is attained with partial compatibility. Moreover, because consumer surplus not only depends on the equilibrium prices but also on the intensity of advertisement, we find that for intermediate equilibrium levels of advertising, consumers prefer fully compatible components rather than full incompatibility. As a result, a more compatible product design benefits all the agents in the economy.
    Keywords: Informative advertisement; product design; partial compatibility; welfare.
    JEL: D21 D43 L13 L15
    Date: 2014–03–26
  12. By: Cea-Echenique, Sebastián; Torres-Martínez, Juan Pablo
    Abstract: We build a general equilibrium model where agents are subject to endogenous trading constraints, making the access to financial trade dependent on prices and consumption decisions. Besides, our framework is compatible with the existence of endogenous financial segmentation and credit markets' exclusion. Two results of equilibrium existence are shown. In the first one, we assume individuals can super-replicate financial payments buying durable commodities and investing in assets that give liquidity to all agents. In the second result, under strict monotonicity of preferences, we suppose there are agents that may compensate with increments in present demand the losses of well-being generated by reductions of future consumption.
    Keywords: Incomplete Markets; General Equilibrium; Endogenous Trading Constraints
    JEL: C62 D52 D53 G1
    Date: 2014–04
  13. By: Christoph Kuzmics (Center for Mathematical Economics, Bielefeld University)
    Abstract: In this note I give a full characterization of all deterministic direct mechanisms in the public good provision problem with independent private values that are dominant strategy incentive compatible, ex-post individually rational, and ex-post budget balanced.
    Keywords: public good provision, asymmetric information, dominant strategy
    JEL: C72 D82 H41
    Date: 2014–03
  14. By: Roig, Guillem
    Abstract: In a common agency setting, where the common buyer undertakes cooperative investment with her suppliers, we obtain a direct link between the level of ex-post competition and investment which affects the market structure of the supply side of the market. We show that more competitive equilibria are associated with a larger and more homogeneous distribution of investment among active suppliers, and an equilibrium with no investment might occur when competition is mild. In our model, buyer's investment works as a mechanism to incentivize competition, and its effectiveness is positively related to the level of competition ex-post. In general, the equilibrium investment profile is lower than efficiency, and we surprisingly find that higher competitive markets may sustain a larger number of suppliers.
    Keywords: cooperative investment; investment distribution; competition.
    JEL: C72 D43 D44
    Date: 2014–03–26
  15. By: Dmitriy Vorobyev
    Abstract: I analyze a costly voting model of elections, in which the incumbent can stuff the ballot box, to investigate how electoral fraud affects the participation decisions of voters. I find that two stable equilibria may exist: first, a full abstention equilibrium, where the incumbent wins with certainty, which exists only if the incumbent's capability to stuff a ballot box is suffciently strong. Second, a more efficient coordination equilibrium, where a substantial share of a challenger's supporters vote and the probability of the incumbent being defeated is large. Since voters do not take into account positive externality they produce on other voters when deciding to cast their votes, participation in coordination equilibrium is still inefficiently low. Thus, subsidization as well as introducing compulsory voting may improve efficiency. Because the higher capability of the incumbent to stuff a ballot box discourages the participation of his own supporters and creates coordination incentives for the challenger's supporters, higher fraud does not always benefit the incumbent, even when costless. Additionally, the model simultaneously explains two empirical observations about fraudulent elections: a positive relationship between fraud and victory margin and a negative effect of fraud on turnout.
    Keywords: voting; fraud; participation;
    JEL: D72 D73
    Date: 2014–02
  16. By: Kauffeldt, Florian; Wiesenfarth, Boris
    Abstract: We analyze a Hotelling location-then-price duopoly game under demand uncertainty with uniformly distributed consumers in a standard quadratic costs scenario. The novelty of our approach consists of assuming that firms' beliefs are represented by non-extreme-outcome-additive (neo-additive) capacities. We derive firms' subgame-perfect product design decisions under ambiguity. Furthermore, we investigate the influence of ambiguity and ambiguity attitude on equilibrium product differentiation and contrast our results with an environment of risky firms. We find that the impact of the degree of confidence or ambiguity is particularly significant when it comes to delivering accurate explanations for a wide range of phenomena related to observed product design behavior.
    Keywords: Hotelling; Confidence; Optimism; Pessimism; Degree of Ambiguity; Choquet Expected Utility; Neo-additive Capacities; Product Differentiation
    Date: 2014–04–17
  17. By: Ahrens, Steffen; Pirschel, Inske; Snower, Dennis J.
    Abstract: We present a new partial equilibrium theory of price adjustment, based on consumer loss aversion. In line with prospect theory, the consumers' perceived utility losses from price increases are weighted more heavily than the perceived utility gains from price decreases of equal magnitude. Price changes are evaluated relative to an endogenous reference price, which depends on the consumers' rational price expectations from the recent past. By implication, demand responses are more elastic for price increases than for price decreases and thus firms face a downward-sloping demand curve that is kinked at the consumers' reference price. Firms adjust their prices flexibly in response to variations in this demand curve, in the context of an otherwise standard dynamic neoclassical model of monopolistic competition. The resulting theory of price adjustment is starkly at variance with past theories. We find that - in line with the empirical evidence - prices are more sluggish upwards than downwards in response to temporary demand shocks, while they are more sluggish downwards than upwards in response to permanent demand shocks. --
    Keywords: price sluggishness,loss aversion,state-dependent pricing
    JEL: D03 D21 E31 E50
    Date: 2014

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