nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒01‒03
eight papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Exclusive Dealing and Vertical Integration in Interlocking Relationships By Nocke, Volker; Rey, Patrick
  2. Dynamic Relational Contracts under Complete Information By Jonathan P. Thomas (The University of Edinburgh); Tim Worrall (The University of Edinburgh)
  3. Managing Intrinsic Motivation in a Long-Run Relationship By Eliaz, Kfir; Spiegler, Ran
  4. Reputational Bidding By Francesco Giovannoni; Miltiadis Makris
  5. Strategic stability of equilibria: the missing paragraph By GRIGIS DE STEFANO, Federico
  6. Quality Competition among Platforms: a Media Market Case By Serena Marianna Drufuca; Maria Rosa Battaggion
  7. Conditional Analysis and a Principal-Agent problem By Julio Backhoff; Ulrich Horst
  8. How Darwinian Should an Economy Be? By Saint-Paul, Gilles

  1. By: Nocke, Volker; Rey, Patrick
    Abstract: We develop a model of interlocking bilateral relationships between upstream firms (manufacturers) that produce differentiated goods and downstream firms (retailers) that compete imperfectly for consumers. Contract offers and acceptance decisions are private information to the contracting parties. We show that both exclusive dealing and vertical integration between a manufacturer and a retailer lead to vertical foreclosure, to the detriment of consumers and society. Finally, we show that firms have indeed an incentive to sign such contracts or to integrate vertically.
    Keywords: bilateral contracting; exclusive dealing; foreclosure; vertical merger; vertical relations
    JEL: D43 L13 L42
    Date: 2014–09
  2. By: Jonathan P. Thomas (The University of Edinburgh); Tim Worrall (The University of Edinburgh)
    Abstract: This paper considers a long-term relationship between two agents who both undertake a costly action or investment that together produces a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. Two cases are considered: (i) where agents are risk neutral and are subject to limited liability constraints and (ii) where agents are risk averse, have quasi-linear preferences in consumption and actions but where limited liability constraints do not bind. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. In the risk-neutral case, there may be an initial phase in which one agent overinvests and the other underinvests. However, both actions and surplus converge monotonically to a stationary state in which there is no overinvestment and surplus is at its maximum subject to the constraints. In the risk-averse case, there is no overinvestment. For this case, we establish that dynamics may or may not be monotonic depending on whether or not it is possible to sustain a first-best allocation. If the first-best allocation is not sustainable, then there is a trade-off between risk sharing and surplus maximization. In general, surplus will not be at its constrained maximum even in the long run.
    Keywords: Relational contracts; self-enforcement; limited commitment; risk sharing.
    JEL: C61 C73 D86 D91 L14
    Date: 2014–01
  3. By: Eliaz, Kfir; Spiegler, Ran
    Abstract: We study a repeated principal-agent interaction, in which the principal offers a "spot" wage contract at every period, and the agent’s outside option follows a Markov process with i.i.d shocks. If the agent rejects an offer, the two parties are permanently separated. At any period during the relationship, the agent is productive if and only if his wage does not fall below a "reference point" (by more than an infinitesimal amount), which is defined as his lagged-expected wage in that period. We characterize the game’s unique subgame perfect equilibrium. The equilibrium path exhibits an aspect of wage rigidity. The agent’s total discounted rent is equal to the maximal shock value.
    Keywords: Dynamic principal agent; Reference-Dependence
    JEL: D03 D86
    Date: 2014–07
  4. By: Francesco Giovannoni; Miltiadis Makris
    Abstract: We consider auctions where bidders care about the reputational effects of their bidding and argue that the amount of information that is disclosed at the end of the auction will influence bidding. Our analysis focuses on several bid disclosure rules that capture all of the realistic cases. We show that bidders distort their bidding in a way that conforms to stylized facts about takeovers/licence auctions. Also, we rank the disclosure rules in terms of the expected revenues they generate and find that, under certain conditions, full disclosure will not be optimal.
    Keywords: Auctions, signaling, disclosure.
    JEL: D44 D82
    Date: 2014–06
  5. By: GRIGIS DE STEFANO, Federico (Université catholique de Louvain, CORE, Belgium)
    Abstract: This paper introduces two set valued Nash equilibrium refinements that are a natural generalization of the concept of stable set of equilibria introduced in Kohlberg and Mertens (1986) and satisfy all the properties defined in Mertens (1989). It also establishes a connection between Nash equilibrium refinements and stochastic games as a tool to define a stable set of equilibria.
    Keywords: game theory, equilibrium refinements, strategic stability, stochastic games
    JEL: A23 C72
    Date: 2014–06–11
  6. By: Serena Marianna Drufuca; Maria Rosa Battaggion
    Abstract: We provide a two-sided model in a vertical di§erentiation context. We solve the model and we calculate the equilibrium in terms of advertising levels, subscription fees and qualities provision, both in duopoly - two platforms of different quality - and in monopoly case. We would like to investigate how competition among platforms and the entry deterrence behavior might a§ect the equilibrium, with particular focus on quality provision.
    Keywords: two-sided market, media; quality
    JEL: D42 D43 L15 L82
    Date: 2014
  7. By: Julio Backhoff; Ulrich Horst
    Abstract: We analyze conditional optimization problems arising in discrete time Principal-Agent problems of delegated portfolio optimization. Applying tools from Conditional Analysis to the case of linear contracts we show that most results known in the literature for very specific instances of the problem carry over to translation invariant and time-consistent utility functions in very general probabilistic settings.
    Date: 2014–12
  8. By: Saint-Paul, Gilles (University of Toulouse I)
    Abstract: This paper studies aggregate dynamics in a cobweb model where learning takes place through a selection mechanism, by which more successful firms are replicated at a higher rate. The structure of the model allows to characterize analytically the aggregate dynamics, and to compute the effect on welfare of alternative levels of selectivity. A central aspect is that greater selectivity, while bringing the distribution of firm types closer to the optimal one at a given date, tends to make the economy less stable at the aggregate level. As in Nelson and Winter (1982), firms differ in their labor/capital ratio. They do not choose it optimally, rather it is a characteristic of a firm. The distribution of firms evolves over time in a way that favors the most profitable firm types. Selection may be inadequate because firms are being selected on the basis of incorrect market signals. Selection itself may reinforce such mispricing, thus generating instability. I compare economies that differ in the volatility and persistence of their productivity shocks, as well as the elasticity of labor supply. The key findings are as follows. First, a trade-off arises since greater selection allows to better track shocks and limits mutational drift in firm types; on the other hand, selection may strengthen cobweb oscillatory dynamics. Second, there seems to be a value in maintaining a diverse "ecology of firms", in order to cope with future shocks. These observations explain the key results. Optimal selectivity is larger, the less "cobweb unstable" the economy, i.e. the more elastic the labor supply. Second, optimal selectivity is larger, the more persistent the aggregate productivity shocks. Finally, optimal selectivity is larger, the lower the variance of productivity innovations. The model can be extended to allow for firm entry and trend productivity growth, and a selection process with memory. Empirical evidence suggests that, in accordance to the model, countries with less regulated product markets exhibit lower aggregate inertia.
    Keywords: cobweb model, adaptive learning, selection, mutation, evolution
    JEL: P10 E32 J20
    Date: 2014–11

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