nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒02‒22
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Platform Pricing under Dispersed Information By Bruno Jullien; Alessandro Pavan
  2. Decentralizability of Multi-Agency Contracting with Bayesian Implementation By Yu Chen
  3. Preferences under Ambiguity Without Event-Separability By Kops, Christopher; Borah, Abhinash
  4. Dynamic Consistent alpha-Maxmin Expected Utility By Patrick Beißner; Qian Lin
  5. Sequential, multidimensional screening By Litterscheid, Sina; Szalay, Dezsö
  6. Search and ripoff externalities By Armstrong, Mark
  7. When and How the Punishment Must Fit the Crime By George J.Mailath; Volker Nocke; Lucy White
  8. Coordination with Independent Private Values: why Pedestrians sometimes bump into each other By Kuzmics, Christoph; Mookherjee, Dilip
  9. Smooth, strategic communication By Deimen, Inga; Szalay, Dezsö
  10. Heterogeneous Beliefs and Imperfect Competition in Sequential Auction Markets By Fabrice Rousseau; Hervé Boco; Laurent Germain
  11. The We and the I: The Logic of Voluntary Associations By Ekaterina Melnik; Jean-Benoît Zimmermann
  12. Frictions Lead to Sorting: a Partnership Model with On-the-Match Search By Cristian Bartolucci; Ignacio Monzon
  13. Reference-Dependent Bidding in Dynamic Auctions By Ott, Marion; Ehrhart, Karl-Martin
  14. Many-to-Many Matching and Price Discrimination By Renato Gomes; Alessandro Pavan
  15. Continuous Time Contests By Seel, Christian
  16. A Unifying Learning Framework for Building Artificial Game-Playing Agents By W Chen; Y Chen; D Levine
  17. Markov Perfect Equilibria in Differential Games with Regime Switching Strategies By Ngo Van Long; Fabien Prieur; Klarizze Puzon; Mabel Tidball
  18. Does polarization of opinions lead to polarization of platforms? the case of correlation neglect By Levy, Gilat; Razin, Ronny
  19. Quantity Competition in the Presence of Strategic Consumers By Bazhanov, Andrei; Levin, Yuri; Nediak, Mikhail
  20. Matching with Slot-Specific Priorities: Theory By Scott Duke Kominers; Tayfun Sönmez
  21. Why prediction markets work : the role of information acquisition and endogenous weighting By Siemroth, Christoph

  1. By: Bruno Jullien; Alessandro Pavan
    Abstract: We study monopoly and duopoly pricing in a two-sided market with dispersed information about users’ preferences. First, we show how the dispersion of information introduces idiosyncratic uncertainty about participation rates and how the latter shapes the elasticity of the demands and thereby the equilibrium prices. We then study informative advertising campaigns affecting the agents’ ability to estimate their own as well as other agents’ valuations, and product design affecting the distribution of valuations on the two sides of the market.
    Keywords: two-sided markets, dispersed information, platform competition, global-games, informative advertising JEL Classification: D82
    Date: 2014–06–01
  2. By: Yu Chen (Indiana University)
    Keywords: multi-agency, Bayesian implementation, mechanism design, menu design, del- egation principle
    JEL: C72 D82 D86
    Date: 2013–08
  3. By: Kops, Christopher; Borah, Abhinash
    Abstract: We propose and axiomatically characterize a representation of ambiguity sensitive preferences. The distinguishing feature of our axiomatization is that we do not require preferences to be event-wise separable over any domain of acts. Even without any such separability restrictions, we are able to uniquely elicit the decision maker's subjective probabilities. The novel axiom that allows us to do so expresses the idea that at least in the domain of a certain class of acts the decision maker exhibits a consistent tradeoff between risk and ambiguity concerns. Under our representation of her preferences, any act is assessed by its subjective expected utility and a residual that captures her assessment of the act's exposure to ambiguity.
    JEL: D81 D00 D80
    Date: 2014
  4. By: Patrick Beißner (Center for Mathematical Economics, Bielefeld University); Qian Lin (School of Economics and Management, Wuhan University)
    Abstract: We establish a class of fully nonlinear conditional expectations. Similarly to the usage of linear expectations when a probabilistic description of uncertainty is present, we observe analogue quantitative and qualitative properties. The type of nonlinearity captures the agents sentiments of optimism and pessimism in an ambiguous environment. We then introduce an expected utility under a nonlinear expectation, and show monotonicity and continuity of utility. Risk aversion is characterized, and the properties of the certainty equivalent are discussed. Finally, we derive an Arrow-Pratt approximation of the static certainty equivalent and investigate the dynamic version via recursive equations.
    Keywords: Nonlinear expectation, Knightian Uncertainty, time consistency, risk aversion, certainty equivalent, optimism and pessimism
    JEL: C60 D81 D90
    Date: 2015–01
  5. By: Litterscheid, Sina; Szalay, Dezsö
    Abstract: We study a sequential screening problem where the agent produces an object consisting of multiple items and has a multidimensional type that he learns over time. Depending on the strength of complementarity/substitutability of the items, the optimal allocation features a different pattern of distortions. For mild complements or substitutes, a simple solution procedure picks up the optimum.
    JEL: D80 D86 D82
    Date: 2014
  6. By: Armstrong, Mark
    Abstract: This paper surveys models of markets in which only some consumers are "savvy". I discuss when the presence of savvy consumers improves the deals available to all consumers in the market (the case of search externalities), and when the non-savvy fund generous deals for all consumers (ripoff externalities). I also discuss when the two groups of consumers have aligned or divergent views about market interventions. The analysis focusses on two kinds of models: (i) an indivisible product in a market with price dispersion, and (ii) products which involve add-on pricing.
    Keywords: Add-on pricing, bounded rationality, consumer protection, consumer search, externalities, price dispersion
    JEL: D11 D18 D4 D83 D86 L1
    Date: 2015–02
  7. By: George J.Mailath (Department of Economics and PIER, University of Pennsylvania, and Research School of Economics, Australian National University); Volker Nocke (University of Mannheim, CESifo and CEPR); Lucy White (Harvard Business School and CEPR)
    Abstract: In repeated normal-form (simultaneous-move) games, simple penal codes (Abreu, 1986, 1988) permit an elegant characterization of the set of subgame-perfect outcomes. We show that the logic of simple penal codes fails in repeated extensive-form games. By means of examples, we identify two types of settings in which a subgame-perfect outcome may be supported only by a profile with the property that the continuation play after a deviation is tailored not only to the identity of the deviator, but also to the nature of the deviation.
    Keywords: Simple Penal Code, Subgame Perfect Equilibrium, Repeated Extensive Game, Optimal Punishment.
    JEL: C70 C72 C73
    Date: 2015–02–15
  8. By: Kuzmics, Christoph; Mookherjee, Dilip
    Abstract: Motivated by trying to better understand the norms that govern pedestrian traffic, I study symmetric two-player coordination games with independent private values. The strategies of "always pass on the left" and "always pass on the right" are always equilibria of this game. Some such games, however, also have other (pure strategy) equilibria with a positive likelihood of mis-coordination. Perhaps sur- prisingly, in some such games, these Pareto-inefficient equilibria, with a positive likelihood of mis-coordination, are the only evolutionarily stable equilibria of the game.
    JEL: C72 C73 D82
    Date: 2014
  9. By: Deimen, Inga; Szalay, Dezsö
    Abstract: We study strategic communication between a Sender and Receiver who are both uncertain about their preferred actions. The Sender observes noisy signals about both players' ideal policies and then communicates with the Receiver. Even though Sender and Receiver disagree about ideal policies as a function of the Sender's information, we can show that: i) there are information structures such that in equilibrium the Sender credibly communicates his ideal policy and the Receiver correctly takes the Sender's advice at face value and ii) the unique outcome of Nash-bargaining over information structures induces precisely a situation where communication about ideal policies is credible. The resulting equilibrium features message strategies that are smooth in a subspace of the Sender's information. Smooth communication equilibria are extremely tractable. Senders with better aligned preferences are endogenously endowed with better information and therefore give more accurate advice.
    JEL: D82 D83 D82
    Date: 2014
  10. By: Fabrice Rousseau (Department of Economics, Finance and Accounting, National University of Ireland, Maynooth); Hervé Boco (Toulouse University, Toulouse Business School, France); Laurent Germain (Toulouse University, Toulouse Business School, France)
    Abstract: This paper analyzes a multi-auction setting in which informed strategic agents are endowed with heterogeneous noisy signals about the liquidation value of a risky asset. One result is that when the variance of the noise is small the competition between traders takes the form of a rat race during all the periods of trading. As we increase the level of the noise in the traders’ signals, a waiting game phase appears and the intensity of the rat race, observed only at the last auctions, decreases. In sharp contrast with the previous literature, when the variance of the noise is very large, we only observe a waiting game.
    Keywords: efficiency, asymmetric information, noise, liquidity, adverse selection, competition
  11. By: Ekaterina Melnik (CEE and LEST / Aix-Marseille University and CNRS); Jean-Benoît Zimmermann (Aix-Marseille University (Aix-Marseille School of Economics) GREQAM / CNRS and EHESS)
    Abstract: This paper sheds new light on the economic logic of voluntary associations and the relationship between individual contribution and collective action. The aims are twofold. Firstly, we seek to explain how “team reasoning” (Bacharach et al. 2006) can deeply change the functioning of voluntary associations (which are considered to produce a public good) when some or all of the individual members group together to make collective decisions about their involvement or contribution, rather than deciding separately. Secondly, we seek to better understand the effects of heterogeneity of resources on individual involvement, in terms of both the budget constraints of individual members and their capacity to contribute differentiated non-monetary contributions to the association, in relation to the diversity of their personal abilities and preferences about the characteristics of the good produced. To this end, we use a model of voluntary association collectively producing a public good, where monetary contributions (compulsory fees plus voluntary donations) is combined with volunteering. We analyze the conditions for an association to offer profitable conditions to its members and the consequences that can be drawn in terms of its existence and size. We show that, at equilibrium, the level of voluntary contributions is ceteris paribus higher when individuals make their decisions on the basis of team-reasoning rather than individually. We analyze the role played by heterogeneity of incomes in the formation of teams within associations. We then introduce the concept of subjective quality into the basic model. The originality of the model is that we assume the public good to be characterized by at least two main components: quantity and quality. The quantity is considered here as a purely public component, insofar as all the members benefit equally from it. However, the quality of the public good is assumed to be a mixed (public and private) component. The agents can enjoy part of it in the same way, but there may be certain characteristics of quality that are difficult or impossible to measure objectively. Quality is always somewhat subjective, to the extent that perfect correspondence with the preferences of heterogeneous agents is unlikely to occur. In our model, the agents can contribute money and/or time and effort. The latter, which we call volunteering, allows them to influence the quality of the good (or service) provided according to their own preferences.
    Keywords: voluntary associations, public good, contribution, voluteering, team reasonning, collective action
    JEL: C71 D71 H4 L3
    Date: 2015–01
  12. By: Cristian Bartolucci; Ignacio Monzon
    Abstract: We present a partnership model where heterogeneous agents bargain over the gains from trade and search on the match. Frictions allow agents to extract higher rents from more productive partners, generating an endogenous preference for high types. More productive agents upgrade their partners faster, therefore the equilibrium match distribution features positive assortative matching. Frictions are commonly understood to hamper sorting. Instead, we show how frictions generate positive sorting even with a submodular production function. Our results challenge the interpretation of positive assortative matching as evidence of complementarity.
    Keywords: Assortative matching; Search frictions; On-the-match search; Bargaining
    JEL: C78 D83 J63 J64
    Date: 2014
  13. By: Ott, Marion; Ehrhart, Karl-Martin
    Abstract: We investigate equilibrium bidding behavior of bidders with reference-dependent preferences and independent private values in single-unit English and Dutch clock auctions. Bidders' reference points are endogenous and determined by their strategy and their beliefs about the other bidders. In deriving their strategy, bidders anticipate changes in their reference point due to updated information about others' values (i.e., the own winning probability) during the course of the auction, and make optimal binary decisions at each price (approve or quit in the English auction and wait or bid in the Dutch auction). First, we solve for personal equilibrium profiles, i.e., profiles of bids that contain for each bidder a bidding strategy that is optimal given the others' bidding strategies and the reference point induced by the own and others' strategies. Second, we consider locally preferred personal equilibrium (LPPE) profiles, i.e., personal equilibrium profiles where no bidder can locally find a better personal equilibrium given the others' fixed strategies by varying his reference point via considering different own strategies. The expected revenue in the Dutch auction is higher than in the English auction in the respective unique LPPE profiles. The difference is mainly driven by the aversion to losing the item in the Dutch auction.
    JEL: D44 D03 C72
    Date: 2014
  14. By: Renato Gomes; Alessandro Pavan
    Abstract: We study centralized many-to-many matching in markets where agents have private information about (vertical) characteristics that determine match values. Our analysis reveals how matching patterns reflect cross-subsidization between sides. Agents are endogenously partitioned into consumers and inputs. At the optimum, the costs of procuring agents-inputs are compensated by the gains from agents-consumers. We show how such cross-subsidization can be achieved through matching rules that have a simple threshold structure and are assortative in the weak-order (set inclusion) sense. We then deliver testable predictions relating the optimal matching rules and price schedules to the distribution of the agents’ characteristics. The analysis has implications for the design of large matching intermediaries, such as advertising exchanges, business-to-business platforms, and online job-matching agencies.
    Keywords: vertical matching markets, many-to-many matching, asymmetric information, mechanism design, cross-subsidization JEL Classification: D82
    Date: 2014–06–01
  15. By: Seel, Christian
    Abstract: This paper introduces a class of contest models in which each player decides when to stop a privately observed Brownian motion with drift and incurs costs depending on his stopping time. The player who stops his process at the highest value wins a prize. We prove existence and uniqueness of a Nash equilibrium outcome and derive the equilibrium distribution in closed form. As the variance tends to zero, the equilibrium outcome converges to the symmetric equilibrium of an all-pay auction. For two players and constant costs, each player's equilibrium pro fit decreases if the drift increases, the variance decreases, or the costs increase.
    JEL: C72 C73 D44
    Date: 2014
  16. By: W Chen; Y Chen; D Levine
    Date: 2015–01–24
  17. By: Ngo Van Long; Fabien Prieur; Klarizze Puzon; Mabel Tidball
    Abstract: We propose a new methodology exploring Markov perfect equilibrium strategies in differential games with regime switching. We develop a general game with two players. Players choose an action that inuences the evolution of a state variable, and decide on the switching time from one regime to another. Compared to the optimal control problem with regime switching, necessary optimality conditions are modifed for the first-mover. When choosing her optimal switching strategy, this player considers the impact of her choice on the other player's actions and consequently on her own payoffs. In order to determine the equilibrium timing of regime changes, we derive conditions that help eliminate candidate equilibrium strategies that do not survive deviations in switching strategies. We then apply this new methodology to an exhaustible resource extraction game.
    Keywords: differential games, regime switching strategies, technology adoption, non-renewable resources
    JEL: C61 C73 Q32
    Date: 2014–12–31
  18. By: Levy, Gilat; Razin, Ronny
    Abstract: In this paper we question the common wisdom that more polarized voters’ opinions imply larger policy polarization. We analyze a voting model in which the source of the polarization in voters’ opinions is “correlation neglect”, that is, voters neglect the correlation in their information sources. Our main result shows that such polarization in opinions does not necessarily translate to policy polarization; when the electoral system is not too competitive (that is, when there is some aggregate noise in the election’s outcome), then voters with correlation neglect may induce lower levels of policy polarization compared with rational electorates.
    Keywords: correlation neglect; polarization; policy polarization; public opinion
    JEL: D72
    Date: 2015–02
  19. By: Bazhanov, Andrei; Levin, Yuri; Nediak, Mikhail
    Abstract: Oligopolistic retailers decide on the initial inventories of an undifferentiated limited-lifetime product offered to strategic consumers. A manufacturer sets the first-period (full) price, while the second-period (clearance) price is determined by a market clearing process. The resulting symmetric pure-strategy equilibria may lead to no sales in the first or second period (Cournot outcome versus collusion), and sales in both periods with the clearance price above or at the salvage value. The equilibria possess a comprehensive set of monotonic properties. In particular, increasing strategic behavior can benefit retailers and hurt consumers, increasing competition may harm the local economy, and high levels of strategic behavior may insure against oversupply that leads to clearance sales at the salvage value. The welfare-optimal number of retailers can lead to the above-cost clearance price.
    Keywords: quantity competition, two-period game, strategic consumers, symmetric equilibria
    JEL: C72 D91 L13
    Date: 2015–01–28
  20. By: Scott Duke Kominers (Harvard University); Tayfun Sönmez (Boston College)
    Abstract: We introduce a two-sided, many-to-one matching with contracts model in which agents with unit demand match to branches that may have multiple slots available to accept contracts. Each slot has its own linear priority order over contracts; a branch chooses contracts by filling its slots sequentially, according to an order of precedence. We demonstrate that in these matching markets with slot-specific priorities, branches' choice functions may not satisfy the substitutability conditions typically crucial for matching with contracts. Despite this complication, we are able to show that stable outcomes exist in this framework and can be found by a cumulative offer mechanism that is strategy-proof and respects unambiguous improvements in priority.
    Keywords: Market Design, Matching with Contracts, Stability, Strategy-Proofness, School Choice, Affirmative Action, Airline Seat Upgrades.
    JEL: C78 D63 D78
    Date: 2014–12–17
  21. By: Siemroth, Christoph
    Abstract: In prediction markets, investors trade assets whose values are contingent on the occurrence of future events, like election outcomes. Prediction market prices have been shown to be consistently accurate forecasts of these outcomes, but we don't know why. I formally illustrate an information acquisition explanation. Traders with more wealth to invest have stronger incentives to acquire information about the outcome, thus tend to have better forecasts. Moreover, their trades have larger weight in the market. The interaction implies that a few well-situated traders can move the asset price toward the true value. One implication for institutions aggregating information is to put more weight on votes of agents with larger stakes, which improves on equal weighting, unless prior distribution accuracy and stakes are negatively related.
    Keywords: Information Acquisition , Information Aggregation , Forecasting , Futures Markets , Prediction Markets
    JEL: D83 D84 G13
    Date: 2014

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