nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒01‒09
28 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Smooth, strategic communication By Deimen, Inga; Szalay, Dezso
  2. Common-Value All-Pay Auctions with Asymmetric Information and Bid Caps By Einy, Ezra; Haimanko, Ori; Orzach, Ram; Sela, Aner
  3. Maximin equilibrium By Ismail M.S.
  4. Strategic Inaccuracy in Bargaining By Hidir, Sinem
  5. Auctions vs. Negotiations:The Effects of Inefficient Renegotiation By Herweg, Fabian; Schmidt, Klaus M.
  6. Perceiving Prospects Properly By Steiner, Jakub; Stewart, Colin
  7. Optimal Effort Incentives in Dynamic Tournaments By Klein, Arnd Heinrich; Schmutzler, Armin
  8. Growth, Slowdowns, and Recoveries By Bianchi, Francesco; Kung, Howard
  9. A Competitive Partnership Formation Process By Andersson, T.; Gudmundsson, J.; Talman, A.J.J.; Yang, Z.
  10. Merger Performance and Managerial Incentives By Matthias Kräkel and Daniel Müller
  11. On the Equivalence between Iterated Application of Choice Rules and Common Belief of Applying these Rules By Michael Trost
  12. Bargaining with Informational Externalities in a Market Equilibrium By Drugov, Mikhail
  13. First-Mover Advantage in Round-Robin Tournaments By Krumer, Alex; Megidish, Reut; Sela, Aner
  14. Inefficient equilibria and lockouts in wage bargaining with discount rates varying in time. By Ahmet Ozkardas; Agnieszka Rusinowska
  15. Observable Strategies, Commitments, and Contracts By Wärneryd, Karl
  16. Credence Goods, Costly Diagnosis, and Subjective Evaluation By Bester, Helmut; Dahm, Matthias
  17. Equilibrium Paths in Discounted Supergames By Kimmo Berg; Mitri Kitti
  18. Allocation Games with Caps: From Captain Lotto to All-Pay Auctions By Sergiu Hart
  19. Endogenous Contractual Externalities By Ozdenoren, Emre; Yuan, Kathy
  20. Product Customization in the Spokes Model By Aoki, Reiko; Hillas, John; Kao, Tina
  21. Precision of Market-Generated Information in Economies with Coordination Motives By Myungkyu Shim; Giacomo Rondina
  22. Optimal Joint Liability Lending and with Costly Peer Monitoring By Carli, Francesco; Uras, R.B.
  23. A Simple Model of Optimal Deterrence and Incapacitation By Steven Shavell
  24. Atomic Cournotian Traders May Be Walrasian. By Codognato, Giulio; Ghosal, Sayantan; Tonin, Simone
  25. Subsistence induced and complementarity induced irrelevance in preferences By Mitra, Manipushpak; Sen, Debapriya
  26. Price Discrimination in Asymmetric Industries: Implications for Competition and Welfare By Hinnerk Gnutzmann
  27. The Beauty Contest and Short-Term Trading By Giovanni Cespa; Xavier Vives
  28. Dynamic monopoly with demand delay By Akio Matsumoto; Keiko Nakayama

  1. By: Deimen, Inga; Szalay, Dezso
    Abstract: We study strategic information transmission in a Sender-Receiver game where players' optimal actions depend on the realization of multiple signals but the players disagree on the relative importance of each piece of news. We characterize a statistical environment - featuring symmetric loss functions and elliptically distributed parameters - in which the Sender's expected utility depends only on the first moment of his posterior. Despite disagreement about the use of underlying signals, we demonstrate the existence of equilibria in differentiable strategies in which the Sender can credibly communicate posterior means. The existence of smooth communication equilibria depends on the relative usefulness of the signal structure to Sender and Receiver, respectively. We characterize extensive forms in which the quality of information is optimally designed of equal importance to Sender and Receiver so that the best equilibrium in terms of ex ante expected payoffs is a smooth communication equilibrium. The quality of smooth equilibrium communication is entirely determined by the correlation of interests. Senders with better aligned preferences are endogenously endowed with better information and therefore give more accurate advice.
    Keywords: elliptical distribution; endogenous information; monotone strategies; multi-dimensional cheap talk; strategic information transmission
    JEL: D82
    Date: 2014–10
  2. By: Einy, Ezra; Haimanko, Ori; Orzach, Ram; Sela, Aner
    Abstract: We study two-player common-value all-pay auctions (contests) with asymmetric information under the assumption that one of the players has an information advantage over his opponent and both players are budget-constrained. We generalize the results for all-pay auctions with complete information, and show that in all-pay auctions with asymmetric information, sufficiently high (but still binding) bid caps do not change the players' expected total effort compared to the benchmark auction without any bid cap. Furthermore, we show that there are bid caps that increase the players' expected total effort compared to the benchmark. Finally, we demonstrate that there are bid caps which may have an unanticipated effect on the players' expected payoffs – one player's information advantage may turn into a disadvantage as far as his equilibrium payoff is concerned.
    Keywords: asymmetric information; bid caps; common-value all-pay auctions; information advantage
    JEL: C72 D44
    Date: 2014–09
  3. By: Ismail M.S. (GSBE)
    Abstract: We introduce a new concept which extends von Neumann and Morgensterns maximin strategy solution by incorporating individual rationality of the players. Maximin equilibrium, extending Nashs value approach, is based on the evaluation of the strategic uncertainty of the whole game. We show that maximin equilibrium is invariant under strictly increasing transformations of the payoffs. Notably, every finite game possesses a maximin equilibrium in pure strategies. Considering the games in von Neumann-Morgenstern mixed extension, we demonstrate that the maximin equilibrium value is precisely the maximin minimax value and it coincides with the maximin strategies in twoperson zerosum games. We also show that for every Nash equilibrium that is not a maximin equilibrium there exists a maximin equilibrium that Pareto dominates it. Hence, a strong Nash equilibrium is always a maximin equilibrium. In addition, a maximin equilibrium is never Pareto dominated by a Nash equilibrium. Finally, we discuss maximin equilibrium predictions in several games including the travelers dilemma.
    Keywords: Noncooperative Games;
    JEL: C72
    Date: 2014
  4. By: Hidir, Sinem
    Abstract: This paper studies a buyer-seller game with pre-trade communication of private horizontal taste from the buyer followed by a take it or leave it offer by the seller. The amount of information transmitted improves the gains from trade, but also determines how this surplus will be shared between the two. Lack of commitment to a price creates a hold-up problem and a trade off between efficiency and rent extraction. In this setting, coarse information arises due to the concerns on the terms of the transaction. As the preferences get less important, information transmission becomes less precise. It is shown that in the buyer optimal equilibria of the static and dynamic games, the messages sent are just informative enough to ensure trade. In the dynamic game, the buyer is always better off sending infor- mative messages only at the first period, implying no gains from gradual revelation of information.
    Keywords: information; cheap-talk; bargaining; buyer-seller relation
    JEL: C72 D83
    Date: 2014–11
  5. By: Herweg, Fabian; Schmidt, Klaus M.
    Abstract: For the procurement of complex goods the early exchange of information is important to avoid costly renegotiation ex post. We show that this is achieved by bilateral negotiations but not by auctions. Negotiations strictly outperforms auctions if sellers are likely to have superior information about possible design improvements, if renegotiation is costly, and if the buyer's bargaining position is sufficiently strong. Moreover, we show that negotiations provide stronger incentives for sellers to investigate possible design improvements than auctions. This provides an explanation for the widespread use of negotiations as a procurement mechanism in private industry.
    Keywords: Auctions; Negotiations; Procurement; Renegotiation; Adaptation Costs; Loss Aversion; Behavioral Contract Theory.
    JEL: D03 D82 D83 H57
    Date: 2014–11–25
  6. By: Steiner, Jakub; Stewart, Colin
    Abstract: When an agent chooses between prospects, noise in information processing generates an effect akin to the winner’s curse. Statistically unbiased perception systematically overvalues the chosen action because it fails to account for the possibility that noise is responsible for making the preferred action appear to be optimal. The optimal perception patterns share key features with prospect theory, namely, overweighting of small probability events (and corresponding underweighting of high probability events), status quo bias, and reference- dependent S-shaped valuations. These biases arise to correct for the winner’s curse effect.
    Keywords: evolution; perception bias; prospect theory
    JEL: D81 D83
    Date: 2014–08
  7. By: Klein, Arnd Heinrich; Schmutzler, Armin
    Abstract: This paper analyzes two-stage rank-order tournaments. A principal decides (i) how to spread prize money across the two periods, (ii) how to weigh performance in the two periods when awarding the second period prize, and (iii) whether to reveal performance after the first period. The information revelation policy depends exclusively on properties of the effort cost function. The principal always puts a positive weight on first-period performance in the second period. The size of the weight and the optimal prizes depend on properties of the observation error distribution; they should be chosen so as to strike a balance between the competitiveness of first- and second-period tournaments. In particular, the principal sets no first-period prize unless the observations in period one are considerably more precise than in period two.
    Keywords: dynamic tournaments; effort incentives; information revelation; repeated contests
    JEL: D02 D44
    Date: 2014–10
  8. By: Bianchi, Francesco; Kung, Howard
    Abstract: We consider a network game with strategic complementarities where the individual reward or the strength of interactions is only partially known by the agents. Players receive different correlated signals and they make inferences about other players' information. We demonstrate that there exists a unique Bayesian-Nash equilibrium. We characterize the equilibrium by disentangling the information effects from the network effects and show that the equilibrium effort of each agent is a weighted combinations of different Katz-Bonacich centralities where the decay factors are the eigenvalues of the information matrix while the weights are its eigenvectors. We then study the impact of incomplete information on a network policy which aim is to target the most relevant agents in the network (key players). Compared to the complete information case, we show that the optimal targeting may be very different.
    Keywords: Bayesian methods; business cycles; DSGE model; endogenous growth; technology diffusion
    Date: 2014–12
  9. By: Andersson, T.; Gudmundsson, J.; Talman, A.J.J. (Tilburg University, Center For Economic Research); Yang, Z.
    Abstract: A group of heterogenous agents may form partnerships in pairs. All single agents as well as all partnerships generate values. If two agents choose to cooperate, they need to specify how to split their joint value among one another. In equilibrium, which may or may not exist, no agents have incentives to break up or form new partnerships. This paper proposes a dynamic competitive adjustment process that always either finds an equilibrium or exclusively disproves the existence of any equilibrium in finitely many steps. When an equilibrium exists, partnership and revenue distribution will be automatically and endogenously determined by the process. Moreover, several fundamental properties of the equilibrium solution and the model are derived.
    Keywords: Partnership formation; adjustment process; equilibrium; assignment market
    JEL: C62 C72 D02
    Date: 2013
  10. By: Matthias Kräkel and Daniel Müller
    Abstract: We consider a two-stage principal-agent model with limited liability in which a CEO is employed as agent to gather information about suitable merger targets and to manage the merged corporation in case of an acquisition. Our results show that the CEO systematically recommends targets with low synergies—even when targets with high synergies are available—to obtain high-powered incentives and, hence, a high personal income at the merger-management stage.
    Keywords: acquisition; merger; moral hazard
    JEL: D82 D86 G34
  11. By: Michael Trost (Max Planck Institute of Economics, Jena)
    Abstract: One central issue tackled in epistemic game theory is whether for a general class of strategic games the solution generated by iterated application of a choice rule gives exactly the strategy profiles that might be realized by players who follow this choice rule and commonly believe they follow this rule. For example, Brandenburger and Dekel (1987) and Tan and Werlang (1988) have established that this coincidence holds for the choice rule of strict undominance in mixtures in the class of finite strategic games, and Mariotti (2003) has established that this coincidence holds for Bernheim's (1984) choice rule of point rationality in the class of strategic games in which the strategy sets are compact Hausdorff and the payoff functions are continuous. In this paper, we aim at studying this coincidence in a general way. We seek to figure out general conditions of the choice rules ensuring it for a general class of strategic games. We state four substantial assumptions on choice rules. If the players' choices rules satisfy - besides the technical assumption of regularity - the properties of reflexivity, monotonicity, Aizerman's property, and the independence of payoff equivalent conditions, then this coincidence applies. This result proves to be strict in the following sense. None of the four substantial properties can be omitted without eliminating the coincidence.
    Keywords: Iterative deletion procedure, common belief, choice rule, epistemic game theory
    JEL: C72 D83
    Date: 2014–11–25
  12. By: Drugov, Mikhail
    Abstract: This paper studies a dynamic bargaining model with informational externalities between bargaining pairs. Two principals bargain with their respective agents about the price they will pay for their work while its cost is agents' private information and correlated between them. The principals benchmark their agents against each other by making the same offers in the equilibrium even if this involves delaying or advancing the agreement compared to the autarky. When principals compete in complements this pattern is reinforced while under competition in substitutes the principals trade off the benefits of differentiation in the product market against the cost of the agents' rent.
    Keywords: adverse selection; bargaining; competition; delay; externalities; information
    JEL: C78 D82 D83 L10
    Date: 2014–06
  13. By: Krumer, Alex; Megidish, Reut; Sela, Aner
    Abstract: We study round-robin tournaments with one prize and four symmetric players. There are three rounds, each of which includes two sequential matches where each player plays against a different opponent in every round. Each pair-wise match is modelled as an all-pay auction. We characterize the sub-game perfect equilibrium and show that a player who plays in the first match of each of the first two rounds has a first-mover advantage as reflected by a significantly higher winning probability as well as a significantly higher expected payoff than his opponents. Therefore, if the contest designer wishes to sustain the fair play principle he has to schedule all the matches in each round at the same time in order to obstruct a meaningful advantage to one of the players.
    Keywords: all-pay contests; round-robin tournaments
    JEL: D44 O31
    Date: 2014–11
  14. By: Ahmet Ozkardas (Turgut Özal Üniversitesi et Centre d'Economie de la Sorbonne); Agnieszka Rusinowska (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: We consider a union-firm wage bargaining in which the preferences of the union and the firm are expressed by sequences of discount rates varying in time. The contribution of the paper is twofold. First, we consider a model in which the union must choose between strike and holdout in case of disagreement. We show that there exist inefficient subgame perfect equilibria in the model where the union engages in several periods of strikes prior to reaching a final agreement. Furthermore, we analyze a wage bargaining in which the firm is allowed to engage in lockouts. We consider a game in which only lockouts are feasible, i.e., strikes are not allowed. We prove that under certain assumptions there is a subgame perfect equilibrium for this game and it leads to an immediate agreement which yields the union a wage contract smaller that the statuts quo contract. Under this equilibrium the firm always locks out the union after its own offer is rejected and holds out after rejecting an offer of the union.
    Keywords: Union, firm bargaining, varying discount rates, subgame perfect equilibrium, inefficient equilibria, strike, lockouts.
    JEL: J52 C78
    Date: 2014–09
  15. By: Wärneryd, Karl (Dept. of Economics)
    Abstract: We consider rules (strategies, commitments, contracts, or computer programs) that make behavior contingent on an opponent’s rule. The set of perfectly observable rules is not well defined. Previous contributions avoid this problem by restricting the rules deemed admissible. We instead limit the information available about rules. Each player can only observe which class, out of a collection of classes smaller than the number of rules, the opponent’s rule belongs to. For any underlying 2-player, finite, normal-form game there is a game extended with coarsely observable strategies that has equilibria with payoffs arbitrarily close to any feasible, individually rational payoff profile.
    Keywords: Cooperation; reciprocity; transparency; commitment; contract
    JEL: C72 C78 D74 D86
    Date: 2014–11–12
  16. By: Bester, Helmut; Dahm, Matthias
    Abstract: We study contracting between a consumer and an expert. The expert can invest in diagnosis to obtain a noisy signal about whether a low–cost service is sufficient or whether a high–cost treatment is required to solve the consumer’s problem. This involves moral hazard because diagnosis effort and signals are not observable. Treatments are contractible, but success or failure of the low–cost treatment is observed only by the consumer. Payments can therefore not depend on the objective outcome but only the consumer’s report, or subjective evaluation. A failure of the low–cost treatment delays the solution of the consumer’s problem by the high–cost treatment to a second period. We show that the first–best solution can always be implemented if the parties’ discount rate is zero; an increase in the discount rate reduces the range of parameter combinations for which the first–best can be obtained. In an extension we show that the first–best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents.
    Keywords: credence goods; information acquisition; moral hazard; subjective evaluation
    JEL: D82 D83 D86 I11
    Date: 2014
  17. By: Kimmo Berg (Systems Analysis Laboratory, Aalto University School of Science); Mitri Kitti (Department of Economics, University of Turku)
    Abstract: This paper characterizes the subgame-perfect pure-strategy equilibrium paths in discounted supergames with perfect monitoring. It is shown that all the equilibrium paths are composed of fragments called elementary subpaths. This characterization result is complemented with an algorithm for finding the elementary subpaths. By using these subpaths it is possible to generate equilibrium paths and payoffs. When there are finitely many elementary subpaths, all the equilibrium paths can be represented by a directed graph. These graphs can be used in analyzing the complexity of equilibrium outcomes. In particular, it is shown that the size and the density of the equilibrium set can be measured by the asymptotic growth rate of equilibrium paths and the Hausdorff dimension of the payoff set.
    Keywords: repeated game, subgame-perfect equilibrium, equilibrium path, graph presentation of paths, complexity
    JEL: C72 C73
    Date: 2014–12
  18. By: Sergiu Hart
    Abstract: A Lotto game is a two-person zero-sum game where each player chooses a distribution on nonnegative real numbers with given expectation, so as to maximize the probability that his realized choice is higher than his opponent's. These games arise in various competitive allocation setups (e.g., contests, research and development races, political campaigns, Colonel Blotto games). A Captain Lotto game is a Lotto game with caps, which are upper bounds on the numbers that may be chosen. First, we solve the Captain Lotto games. Second, we show how to reduce all-pay auctions to simpler games—expenditure games—using the solution of the corresponding Lotto games. As a particular application we solve all-pay auctions with unequal caps, which yield a significant increase in the seller's revenue (or, the players' efforts).
    Date: 2014–11
  19. By: Ozdenoren, Emre; Yuan, Kathy
    Abstract: We study ffort and risk-taking behaviour in an economy with a continuum of principal-agent pairs where each agent exerts costly hidden effort. When the industry productivity is uncertain, agents have motivations to match the industry average effort, which results in contractual externalities. Contractual externalities have welfare changing effects when the information friction is correlated and the industry risk is not revealed. This is because principals do not internalize the impact of their choice on other principals' endogenous industry risk exposure. Relative to the second best, if the expected productivity is high, risk-averse principals over-incentivise their own agents, triggering a rat race in effort exertion, resulting in over-investment in effort and excessive exposure to industry risks relative to the second best. The opposite occurs when the expected productivity is low.
    Keywords: boom-bust effort exertion; contractual externalities; relative and absolute performance contracts; risk taking
    JEL: D86 G01 G30
    Date: 2014–07
  20. By: Aoki, Reiko; Hillas, John; Kao, Tina
    Abstract: We use a spokes model to analyze ?ms?customization incentives when facing the choices of standard and niche products. Products at or near the end of the spokes are customized products, while products near the origin are more standardized products that cater to the taste of many consumers. Our results indicate that although monopolist always offers the standard product, if a ?m anticipates entry, it may choose to stake claim to a customized product. For low transportation costs, the early entrant chooses the standard product. But this equilibrium is characterized by aggressive pricing behavior.
    Keywords: product differentiation, product customization, entry, spatial oligopoly
    JEL: L11 L13
    Date: 2014–11
  21. By: Myungkyu Shim (University of California, San Diego); Giacomo Rondina (University of California, San Diego)
    Abstract: a class of economies where firms display coordination motives in presence of dispersed information and where the outcome of the coordination is traded in a competitive asset market ´a-la Grossman and Stiglitz (1980). We show that when more private information is injected in the coordination economy the equilibrium asset price becomes less informative. To showcase the relevance of our result we present an application to a problem of endogenous information choice where the "Knowing What Others Know" property of information acquisition derived by Hellwig and Veldkamp (2009) breaks down in presence of market-generated information.
    Date: 2014
  22. By: Carli, Francesco; Uras, R.B. (Tilburg University, Center For Economic Research)
    Abstract: This paper characterizes an optimal group loan contract with costly peer monitoring. Using a fairly standard moral hazard framework, we show that the optimal group lending contract could exhibit a joint-liability scheme. However, optimality of joint-liability requires the involvement of a group leader, who heavily takes care of the partner's repayment share in bad states and gets compensated in expected terms. This key result holds even for a group of borrowers, which exhibits homogeneous characteristics in productivity, risk aversion and monitoring costs. Our work rationalizes the widely-applied group-leadership concept of microfinance programmes as an outcome of an optimal contract.
    Keywords: Micro finance; Joint-liability; Group leader.
    JEL: G21 O12 O16
    Date: 2014
  23. By: Steven Shavell
    Abstract: The deterrence of crime and its reduction through incapacitation are studied in a simple multiperiod model of crime and law enforcement. Optimal imprisonment sanctions and the optimal probability of sanctions are determined. A point of emphasis is that the incapacitation of individuals is often socially desirable even when they are potentially deterrable. The reason is that successful deterrence may require a relatively high probability of sanctions and thus a relatively high enforcement expense. In contrast, incapacitation may yield benefits no matter how low the probability of sanctions is—implying that incapacitation may be superior to deterrence.
    JEL: K14 K42
    Date: 2014–12
  24. By: Codognato, Giulio; Ghosal, Sayantan; Tonin, Simone
    Abstract: In a bilateral oligopoly, with large traders, represented as atoms, and small traders, represented by an atomless part, when is there a non-empty intersection between the sets of Walras and Cournot-Nash allocations? Using a two commodity version of the Shapley window model, we show that a necessary and sufficient condition for a Cournot- Nash allocation to be a Walras allocation is that all atoms demand a null amount of one of the two commodities. We provide two examples which show that this characterization holds non-vacuously. When our condition fails to hold, we also confirm, through some examples, the result obtained by Okuno, Postlewaite, and Roberts (1980): small traders always have a negligible influence on prices, while the large traders keep their strategic power even when their behavior turns out to be Walrasian in the cooperative framework considered by Gabszewicz and Mertens (1971) and Shitovitz (1973).
    Date: 2014
  25. By: Mitra, Manipushpak; Sen, Debapriya
    Abstract: In a two-good setting we axiomatize (a) preferences with subsistence consumption and (b) a generalized version of Leontief preferences. Our axiomatization allows for different levels of subsistence and captures the presence of poverty and prosperity. Our axioms are based on the irrelevance of one of the goods at certain consumption bundles. For subsistence, the irrelevance is induced by the subsistence requirement and for generalized Leontief, it is induced by complementarity. We capture this difference using the notion of unhappy sets.
    Keywords: Subsistence, irrelevance, unhappy sets, generalized Leontief
    JEL: D11 O12
    Date: 2014–10–25
  26. By: Hinnerk Gnutzmann (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: Price discrimination by consumer's purchase history is widely used in regulated industries, such as communication or utilities, both by incumbents and entrants. I show that such discrimination can have surprisingly negative welfare eects { even though prices and industry prots fall, so does consumer surplus. Earlier studies that did not allow entrants to discriminate or assumed symmetric rms yielded sharply dierent results, the pro{competitive eect of price discrimination are stronger in these settings. Imposing a pricing constraint on incumbent's discrimination leads the entrant to discriminate more heavily, but still improves both consumer and producer welfare.
    Keywords: History{based price discrimination, asymmetric price discrimination, switching cost
    JEL: L13 L41
    Date: 2014–11
  27. By: Giovanni Cespa (Cass Business School, CEPR, and CSEF); Xavier Vives (IESE Business School)
    Abstract: Short-termism need not breed informational price inefficiency even when generating Beauty Contests. We demonstrate this claim in a two-period market with persistent liquidity trading and risk-averse, privately informed, short-term investors and find that prices reect average expectations about fundamentals and liquidity trading. Informed investors engage in "retrospective" learning to reassess inferences (about fundamentals) made during the trading game's early stages. This behavior introduces strategic complementarities in the use of information and can yield two stable equilibria that can be ranked in terms of liquidity, volatility, and informational efficiency. We derive implications that explain market anomalies as well as empirical regularities.
    Keywords: price speculation, multiple equilibria, average expectations, public information, momentum and reversal
    JEL: G10 G12 G14
    Date: 2014–11–26
  28. By: Akio Matsumoto; Keiko Nakayama
    Abstract: Implicit in the text-book monopoly is an assumption of complete and instantaneous information or knowledge available to economic agents at free of charge. Under such circumstances, knowing the certain price and cost functions, the monopolist can make an optimal decision of price and output to maximize its profit and realize it. As a result, the text-book monopoly model becomes static in nature. There are, however, many empirical works to indicate that such an assumption of rational economic agents goes too far. In reality the monopolist is boundedly rational and adjusts its price and output as a function of its limited knowledge and past experiences. To fill this gap, we propose, in this study, to relax this assumption and develop a dynamic monopoly model. In particular, we assume first that the monopolist has only partial information about the market condition and second that the monopolist obtains it with time delay. In natural consequence of these alternations, the monopolist cannot jump to the optimal point but searches for it with using the actual data obtained through the market. The modified model becomes dynamic in nature. This is the issue far outside the scope of the text book monopoly and it is what we will consider in this study. In the recent literature, various learning processes of the boundedly rational monopolist have been extensively studied. Puu [1995, CSF] constructs a discrete-time monopoly model in which price function is cubic and cost function is linear. It is shown that the gradient learning or search process based on locally obtained information might behave in an erratic way under the condition that the price function has an inflection point. Assuming that the monopolist uses a rule of thumb to determine quantity to produce, Naimzada and Ricchiute [2008, AMC] reconsider Puu's model with a linear cost function and a cubic price function without the inflection point. Their model is then generalized by Askar [2013, EM] who replaces the cubic function with higher-order polynomials. Matsumoto and Szidarovszky [2013] further generalize Asker's model by introducing the more general type of the cost function. Since those models are described by one dimensional difference equation, chaotic dynamics can arise via period-doubling bifurcation. In this study we reconsider a dynamic monopoly model from two different points of view. First, to detect the effect caused by non-instantaneous information, the dynamic process is constructed in continuous-time scales and a fixed time delay is introduced. Second, we discretize the continuous process to obtain a 'delay' discrete process and analyse the delay effect on discrete dynamics. In both models, local stability of a stationary state is analytically considered and global dynamics is numerically examined.
    Keywords: Dynamic monopoly; bounded rational; time delay; nonlinea dnamics
    JEL: C62 C63 D42
    Date: 2014–11

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