nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒05‒04
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Strong equilibrium in games with common and complementary local utilities By Kukushkin, Nikolai S.
  2. A new epistemic model By Pintér, Miklós
  3. Strategically Equivalent Contests By Chowdhury, Subhasish; Sheremeta, Roman
  4. Ideological Dissent in Downsian Politics By Siddhartha Bandyopadhyay; Manaswini Bhalla; Kalysan Chatterjee; Jaideep Roy
  5. Too much or too little? Price-discrimination in a market for credence goods By Uwe Dulleck; Rudolf Kerschbamer; Alexander Konovalov
  6. Existence of an Equilibrium for Lower Semicontinuous Information Acquisition Functions By Agnes Bialecki; Eleonore Haguet; Gabriel Turinici
  7. Hotelling Games on Networks: Efficiency of Equilibria. By Gaëtan Fournier; Marco Scarsini
  8. Consumer Choice Theory and Social Learning By Anaïs Carlin
  9. Behaviour-Based Price Discrimination with Retention Offers By Rosa-Branca Esteves
  10. Awards are a Special Kind of Signal By Bruno S. Frey; Jana Gallus
  11. With God We Trust: Religion, Trust and Cooperation in Large-Scale Societies By Julien Gagnon
  12. Behaviour-Based Price Discrimination under Advertising and Imperfectly Informed Consumers By Rosa-Branca Esteves; Sofia Cerqueira
  13. Product Upgrades and Posted Prices By Mustafa Dogan_
  14. Optimal Rationing within a Heterogenous Population. By Philippe Choné; Stéphane Gauthier
  15. A Theory of Price Adjustment under Loss Aversion By Ahrens, Steffen; Pirschel, Inske; Snower, Dennis J.

  1. By: Kukushkin, Nikolai S.
    Abstract: A rather general class of strategic games is described where the coalition improvements are acyclic and hence strong equilibria exist: The players derive their utilities from the use of certain "facilities"; all players using a facility extract the same amount of "local utility" therefrom, which amount depends both on the set of users and on their actions, and is decreasing in the set of users; the "ultimate" utility of each player is the minimum of the local utilities at all relevant facilities. Two important subclasses are "games with structured utilities," basic properties of which were discovered in 1970s and 1980s, and "bottleneck congestion games," which attracted researchers' attention quite recently. The former games are representative in the sense that every game from the whole class is isomorphic to one of them. The necessity of the minimum aggregation for the "persistent" existence of strong equilibria, actually, just Pareto optimal Nash equilibria, is established.
    Keywords: Strong equilibrium; Weakest-link aggregation; Coalition improvement path; Congestion game; Game with structured utilities
    JEL: C72
    Date: 2014–04–21
  2. By: Pintér, Miklós
    Abstract: Meier (2012) gave a "mathematical logic foundation" of the purely measurable universal type space (Heifetz and Samet, 1998). The mathematical logic foundation, however, discloses an inconsistency in the type space literature: a finitary language is used for the belief hierarchies and an infinitary language is used for the beliefs. In this paper we propose an epistemic model to fix the inconsistency above. We show that in this new model the universal knowledgebelief space exists, is complete and encompasses all belief hierarchies. Moreover, by examples we demonstrate that in this model the players can agree to disagree Aumann (1976)'s result does not hold, and Aumann and Brandenburger (1995)'s conditions are not sufficient for Nash equilibrium. However, we show that if we substitute selfevidence (Osborne and Rubinstein, 1994) for common knowledge, then we get at that both Aumann (1976)'s and Aumann and Brandenburger (1995)'s results hold.
    Keywords: Incomplete information game, Agreeing to disagree, Nash equilibrium, Epistemic game theory, Knowledge-belief space, Belief hierarchy, Common knowledge, Self-evidence, Nash equilibrium
    JEL: C70 C72 D80 D82 D83
    Date: 2014–04–18
  3. By: Chowdhury, Subhasish; Sheremeta, Roman
    Abstract: Using a two-player Tullock-type contest we show that intuitively and structurally different contests can be strategically equivalent. Strategically equivalent contests generate the same best response functions and, as a result, the same equilibrium efforts. However, strategically equivalent contests may yield different equilibrium payoffs. We propose a simple two-step procedure to identify strategically equivalent contests. Using this procedure, we identify contests that are strategically equivalent to the original Tullock contest, and provide new examples of strategically equivalent contests. Finally, we discuss possible contest design applications and avenues for future theoretical and empirical research.
    Keywords: rent-seeking, contest, equivalence, contest design
    JEL: C72 D72 D74
    Date: 2014–04–18
  4. By: Siddhartha Bandyopadhyay; Manaswini Bhalla; Kalysan Chatterjee; Jaideep Roy
    Abstract: We analyze the Hotelling-Downs model of a winner-take-all elections with sequential entry where n > 2 'office-seeking' candidates with privately known qualities arrive in an order to announce platform commitments and voters receive partially informative exogenous signals about quality of each contestant. We characterize two-party equilibria when the order of entry is exogenously given. In these equilibria, entry can occur in any 'round' with positive probability: high quality candidates signal their type through showing ideological dissent with the voters while low quality ones randomize between (mis)-signaling quality through dissent and staying out. An interesting implication of this is that while the presence of a partially informative press can keep low quality candidates out of competition up to a certain degree, electoral competition improves voter's information about candidate types beyond what the press can reveal. However this endogenous mechanism of strategic information transmission leads to a political polarization. We then endogenize the order of entry to show that in general some high quality candidates enter early and others enter late while all low quality candidates either stay out or enter late. Moreover, while extremism continues to signal quality, there must be a gradual moderation in ideology although information revelation is non-monotonic in time with full revelation for early and late entrants and only partial revelation for intermediate entrants.
    Keywords: Sequential entry, Unobserved quality, Stratetic dissent, Polarization, Endogenous Order
    JEL: C72 D72 D82
    Date: 2014–04
  5. By: Uwe Dulleck; Rudolf Kerschbamer; Alexander Konovalov
    Abstract: In markets for credence goods sellers are better informed than their customers about the quality that yields the highest surplus from trade. This paper studies second-degree price-discrimination in such markets. It shows that discrimination regards the amount of advice offered to customers and that it leads to a different distortion depending on the main source of heterogeneity among consumers. If the heterogeneity is mainly in the expected cost of efficient service, the distortion involves overprovision of quality. By contrast, if consumers differ mainly in the surplus generated whenever the consumer's needs are met, the inefficiency involves underprovision of quality.
    Keywords: Price Discrimination, Credence Goods, Experts, Discounters, Distribution Channels
    JEL: L15 D82 D40
    Date: 2014–04
  6. By: Agnes Bialecki (ENS LYON - École normale supérieure de Lyon - École Normale Supérieure (ENS) - Lyon); Eleonore Haguet (ENSAE - École Nationale de la Statistique et de l'Administration Économique - ENSAE ParisTech); Gabriel Turinici (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)
    Abstract: We consider a two-period model in which a continuum of agents trade in a context of costly information acquisition and systematic heterogeneous expectations biases. Because of systematic biases agents are supposed not to learn from others' decisions. In a previous work under somehow strong technical assumptions a market equilibrium was proved to exist and the supply and demand functions were proved to be strictly monotonic with respect to the price. Here we extend these results under very weak technical assumptions. We also prove that the equilibrium price maximizes the trading volume and further additional properties (such as the antimonotonicity of the trading volume with respect to the marginal information price).
    Keywords: information acquisition; heterogeneous beliefs; heterogeneous estimations; Grossman-Stiglitz paradox; costly information
    Date: 2014–04–22
  7. By: Gaëtan Fournier (Centre d'Economie de la Sorbonne); Marco Scarsini (Dipartimento di Economia e Finanza - LUISS, Roma)
    Abstract: We consider a Hotelling game where a finite number of retailers choose a location, given that their potential customers are distributed on a network. Retailers do not compete on price but only on location, therefore each consumer shops at the closest store. We show that when the number of retailers is large enough, the game admits a pure Nash equilibrium and we construct it. We then compare the equilibrium cost bore by the consumers with the cost that could be achieved if the retailers followed the dictate of a benevolent planner. We perform this comparison in term of the induced price of anarchy, i.e., the ratio of the worst equilibrium cost and the optimal cost, and the induced price of stability, i.e., the ratio of the best equilibrium cost and the optimal cost. We show that, asymptotically in the number of retailers, these ratios are two and one, respectively.
    Keywords: Induced price of anarchy, induced price of stability, location games on networks, pure equilibria, large games.
    JEL: C72 R30 R39
    Date: 2014–04
  8. By: Anaïs Carlin (University of Nice Sophia Antipolis, France; GREDEG CNRS)
    Abstract: In this paper we formalize learning as a determinant of individual choice. We model economic agent as an individual who makes her choice according to a specific set of experiences, which evolves over time as the agent learns from both her personal history and her social environment. We link preferences to choices through the notion of hierarchy of wants. We present an axiomatic characterization, inspired by Georgescu-Roegen (1950, 1954), of the individual choice mechanism in a social environment. Following these axioms, we show that an agent may change her choice from one period to another and remain nonetheless rational. The learning mechanism allows for the modication of individual preference ordering over time as well as it implies irreversibility, in the sense that economic changes leave a mark in the decision making process.
    Keywords: Preference formation, preference change, learning, path dependency
    JEL: D01 D11 D83
    Date: 2014–04
  9. By: Rosa-Branca Esteves (Universidade do Minho - NIPE)
    Abstract: This paper is a first step in investigating the competitive and welfare effects of behavior-based price discrimination (BBPD) in markets where firms have information to employ retention strategies as an attempt to avoid the switching of their clientele to a competitor. We focus on retention activity in the form of a discount offered to a consumer expressing an intention to switch. When retention strategies are allowed, forward looking firms anticipate the effect of first period market share on second period profits and price more aggressively in the first-period. Thus,first period equilibrium price under BBPD with retention strategies is below its non-discrimination counterpart. This contrasts with first period price above the non-discrimination level if BBPD is used and retention activity is forbidden. Regarding second period prices, the use of retention offers increase the price offered to those consumers who do not signal am intention to switch; the reverse happens to those consumers who decide to switch after being exposed to retention offers. As in other models where consumers have stable exogenous brand preferences, the instrument of BBPD is bad for profits and welfare but good for consumers. BBPD with the additional tool of retention activity boosts consumer surplus and overall welfare but decreases industry profit.
    Date: 2014
  10. By: Bruno S. Frey; Jana Gallus
    Abstract: Awards appear in various forms, ranging from the title "Employee of the Month" to prizes, decorations, and other honors. This contribution develops a theory designed to analyze the widely-observed phenomenon of award giving. We use signaling theory as a basis for our discussion. The perspectives of the giver, and of (potential) recipients, of awards are studied in a principal-agent framework. The analysis highlights conditions under which signaling failures are likely to arise and compares awards with monetary compensation. The paper informs management practice by presenting a systematic appraisal of the signaling functions of awards. It proposes under which conditions awards tend to raise performance, and when monetary compensation proves to be superior.
    Keywords: Awards; prizes; incentives; signaling theory; principal-agent framework
    Date: 2014–02
  11. By: Julien Gagnon
    Abstract: The first aim of this paper is to revisit the puzzle of cooperation in large-scale societies.It proposes a game theoretic model showing how endogenous emotion-based punishment can sustain ull cooperation when interactions are not repeated, provided that players' endogenous trust is high enough. The model the signalling theory of religion. Finally, the model enables clear and tractable predictions about the levels of religious affiliation and participation within a society. Evidence of the model's implications is discussed.
    Keywords: Cooperation; Emotions; Psychological Game Theory; Punishment; Religion; Trust.
    JEL: D02 D03 D71 D81 Z12
    Date: 2014–04–29
  12. By: Rosa-Branca Esteves (Universidade do Minho - NIPE); Sofia Cerqueira (Universidade do Minho)
    Abstract: This paper is a first look at the dynamic effects of BBPD in a horizontally differentiation product market, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. In comparison to no discrimination, it is shown that firms reduce their advertising efforts, charge higher first period prices and lower second period prices. In comparison to no discrimination, in contrast to the profit and consumer welfare results obtained under full informed consumers, it is shown that BBPD boosts industry profits and harms consumers.
    Date: 2014
  13. By: Mustafa Dogan_ (Department of Economics, University of Pennsylvania)
    Abstract: We consider the dynamic pricing problem of a durable good monopolist with full commitment power, when a new version of the good is expected at some point in the future. The new version of the good is superior to the existing one, bringing a higher ow utility. If the arrival is a stationary stochastic process, then the corresponding optimal price path is shown to be constant for both versions of the good, hence there is no delay on purchases and time is not used to discriminate over buyers, which is in line with the literature. However, if the arrival of the new version occurs at a commonly known deterministic date, then the optimal price path may be decreasing over time, resulting in delayed purchases. For both stochastic and deterministic arrival processes, posted prices is not the optimal mechanism, which on the other hand, involves into bundling of both new and old versions of the good and selling them only together.
    Keywords: durable goods, product upgrades, commitment, posted prices, dynamic mechanism design
    JEL: D42 D82
    Date: 2014–04–28
  14. By: Philippe Choné (CREST-ENSAE); Stéphane Gauthier (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: A government agency delegates to a provider (hospital, medical gatekeeper, school, social worker) the decision to supply a service or treatment to individual recipients. The agency does not perfectly know the distribution of individual treatment costs in the population. The single-crossing property is not satisfied when the uncertainty pertains to the dispersion of the distribution. We find that the provision of service should then be distorted upwards relative to efficiency when the (first-best) efficient number of recipients is sufficiently high.
    Keywords: Rationing, screening, universal coverage, upward distortion, Spence-Mirrlees condition.
    JEL: I18 D82 D61
    Date: 2014–01
  15. By: Ahrens, Steffen (Kiel Institute for the World Economy); Pirschel, Inske (Kiel Institute for the World Economy); Snower, Dennis J. (Kiel Institute for the World Economy)
    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: 2014–04

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