nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒10‒13
eleven papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. The Limits of Price Discrimination By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  2. Non-Implementability of Arrow-Debreu Equilibria by Continuous Trading Under Knightian Uncertainty By Frank Riedel; Patrick Beissner
  3. Revenue Equivalence Revisited: Bounded Rationality in Auctions By Konrad RICHTER
  4. Optimal Risk Sharing with Optimistic and Pessimistic Decision Makers By Aloisio Araujo; Jean-Marc Bonnisseau; Alain Chateauneuf; Rodrigo Novinski
  5. Optimal incentive contracts to avert firm relocation By Pollrich, Martin; Schmidt, Robert C.
  6. A Utility-Based Model of Sales with Informative Advertising By Sandro Shelegia; Chris M. Wilson
  7. Cognitive Diversity, Binary Decisions, and Epistemic Democracy By John A Weymark
  8. Framing Contingencies in Contracts By Xiaojian ZHAO
  9. A General and Intuitive Envelope Theorem. By Andrew Clausen (The University of Edinburgh); Carlo Strub (University of St. Gallen)
  10. A Game Theory Model of Inverse Pricing Strategy By Ying KONG; Hsiao-Chan WANG
  11. Sequential Product Innovation, Competition and Patent Policy By George Norman; Lynne Pepall; Dan Richards

  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: Frank Riedel (Center for Mathematical Economics, Bielefeld University); Patrick Beissner (Center for Mathematical Economics, Bielefeld University)
    Abstract: Under risk, Arrow-Debreu equilibria can be implemented as Radner equilibria by continuous trading of few long-lived securities. We show that this result generically fails if there is Knightian uncertainty in the volatility. Implementation is only possible if all discounted net trades of the equilibrium allocation are mean ambiguity-free.
    Keywords: Knightian Uncertainty, Ambiguity, General Equilibrium, Asset Pricing, Radner Equilibrium
    JEL: D81 C61 G11
    Date: 2014–09
  3. By: Konrad RICHTER
  4. By: Aloisio Araujo; Jean-Marc Bonnisseau; Alain Chateauneuf; Rodrigo Novinski
    Abstract: We prove that under mild conditions individually rational Pareto optima will exist
    Date: 2014–09–25
  5. By: Pollrich, Martin; Schmidt, Robert C.
    Abstract: A unilateral policy intervention by a country (such as the introduction of an emission price) can induce firms to relocate to other countries. We analyze a dynamic game where a regulator offers contracts to avert relocation of a firm in each of two periods. The firm can undertake a location-specific investment (e.g., in abatement capital). Contracts can be written on some contractible productive activity (e.g., emissions), but the firm's investment is not contractible. A moral hazard problem arises under short-term contracting that makes it impossible to implement outcomes with positive transfers in the second period. The regulator resorts to high-powered incentives in the first period. The firm then overinvests and a lock-in effect prevents relocation in both periods. Paradoxically, the distortion in the firstperiod contract can be so severe that higher transfers are needed to avert relocation compared to a (hypothetical) situation without the investment opportunity.
    Keywords: moral hazard; contract theory; limited commitment; firm mobility; abatement capital
    JEL: D82 D86 L51 Q58
    Date: 2014–09–16
  6. By: Sandro Shelegia; Chris M. Wilson
    Abstract: This paper presents a generalised framework to understand mixed-strategy sales behaviour with informative advertising. By introducing competition in the utility space into a clearinghouse sales model, we oer a highly tractable framework that can i) provide a novel welfare analysis of intra-personal price discrimination in sales markets, ii) characterise sales in a range of new contexts including complex market settings and situations where rms conduct sales with two-part taris or non-price variables such as package size, and iii) synthesise past research and highlight its key forces and assumptions.
    JEL: L13 D43 M37 D83
    Date: 2014–09
  7. By: John A Weymark (Vanderbilt University)
    Abstract: In Democratic Reason, Hélène Landemore has built a case for the epistemic virtues of inclusive deliberative democracy based on the cognitive diversity of the group engaged in making collective decisions. She supports her thesis by appealing to the Diversity Trumps Ability Theorem of Lu Hong and Scott Page. In practice, deliberative assemblies often restrict attention to situations with only two options. In this paper, it is shown that it is not possible to satisfy the assumptions of the Diversity Trumps Ability Theorem when decisions are binary. The relevance of this theorem for democratic decision-making in non-binary situations is also considered.
    Keywords: epistemic democracy, Diversity Trumps Ability Theorem
    JEL: D7 Y8
  8. By: Xiaojian ZHAO
  9. By: Andrew Clausen (The University of Edinburgh); Carlo Strub (University of St. Gallen)
    Abstract: We present an envelope theorem for establishing first-order conditions in decision problems involving continuous and discrete choices. Our theorem accommodates general dynamic programming problems, even with unbounded marginal utilities. And, unlike classical envelope theorems that focus only on differentiating value functions, we accommodate other endogenous functions such as default probabilities and interest rates. Our main technical ingredient is how we establish the differentiability of a function at a point: we sandwich the function between two differentiable functions from above and below. Our theory is widely applicable. In unsecured credit models, neither interest rates nor continuation values are globally differentiable. Nevertheless, we establish an Euler equation involving marginal prices and values. In adjustment cost models, we show that first-order conditions apply universally, even if optimal policies are not (S,s). Finally, we incorporate indivisible choices into a classic dynamic insurance analysis.
    Keywords: First-order conditions, discrete choice, unsecured credit, adjustment costs, informal insurance arrangements.
    Date: 2014–09–22
  10. By: Ying KONG; Hsiao-Chan WANG
  11. By: George Norman; Lynne Pepall; Dan Richards
    Abstract: This paper examines the role of patent policy in a spatial model of sequential innovation. Initial entrepreneurs develop a new product market and anticipate that subsequent innovation may lead to a product line that consumers value more highly. The likelihood of sequential innovation increases with the number of initial early entrants in the market. Patent protection that encourages early entry can therefore raise the probability of both initial and subsequent innovation. We determine the optimal patent breadth as a function of key industry characteristics of both consumer taste and the new technology.
    Keywords: sequential innovation, patent policy, entry
    JEL: L5 O25

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