nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒06‒13
twelve papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Overconfident Consumers in the Marketplace By Michael D. Grubb
  2. Confidence Models of Incomplete Preferences By Morgan McClellon
  3. Alliance formation in contests with incomplete information By Metzger, Lars P.
  4. Bayesian Learning with Multiple Priors and Non-Vanishing Ambiguity By Alexander Zimper; Wei Ma
  5. Reaching Consensus Through Simultaneous Bargaining By Jean-François Laslier; Matías Núñez; Carlos Pimienta
  6. Intimidation: Linking Negotiation and Conflict By Sambuddha Ghosh; Gabriele Gratton; Caixia Shen
  7. Unique Random Utility Representations By Morgan McClellon
  8. Informative Advertising with Discretionary Search By Gardete, Pedro M.; Guo, Liang
  9. Non-Additive Random Utility Functions By Morgan McClellon
  10. Prices, Profits, and Preference Dependence By Chen, Yongmin; Riordan, Michael
  11. Revenue maximizing head starts in contests By Franke, Jörg; Leininger, Wolfgang; Wasser, Cédric
  12. From Walras' auctioneer to continuous time double auctions: A general dynamic theory of supply and demand By Jonathan Donier; Jean-Philippe Bouchaud

  1. By: Michael D. Grubb (Boston College)
    Keywords: overconfidence; overoptimism; overprecision; bias; naiveté; three-part tariff; present bias; self-control; prospective memory; inattention; pass-through; nudge; contract; behavioral industrial organization
    JEL: D41 D42 D43 D81 D82 D83 L11 L12 L13 L15
    Date: 2015–03–15
  2. By: Morgan McClellon
    Abstract: This paper introduces and axiomatizes a new class of representations for incomplete preferences called confidence models. Confidence models describe decision makers who behave as if they have probabilistic uncertainty over their true preferences, and are only willing to express a binary preference if it is sufficiently likely to hold. Confidence models are flexible enough to model behavior on a variety of domains, and they are general enough to nest the popular multi-utility models of incomplete preferences. Most importantly, they provide a natural way to connect incomplete preferences with stochastic choice. This connection is characterized by a simple condition that serves to identify the behavioral content of incomplete preferences. 
    Date: 2015–06
  3. By: Metzger, Lars P.
    Abstract: This paper studies a contest in which players with unobservable types may form an alliance in a pre-stage of the game to join their forces and compete for a prize. We characterize the pure strategy equilibria of this game of incomplete information. We show that if the formation of an alliance is voluntary, players do not reveal private information in the process of alliance formation in any equilibrium. In this case there exists a pooling equilibrium without alliances with a unique effort choice in the contest and there exist equilibria in which all types prefer to form an alliance. If the formation of an alliance can be enforced by one player with positive probability there exists an equilibrium in which only the low types prefer to form an alliance.
    Abstract: Der vorliegende Aufsatz untersucht ein Modell, in welchem Agenten mit unbeobachtbaren Typen ihre Kräfte in Allianzen vereinen können, bevor sie in einen Wettstreit um eine Ressource eintreten. Wir beschreiben die Gleichgewichte in reinen Strategien dieses Spiels unter unvollständiger Information. Für den Fall des freiwilligen Eintritts in eine Allianz zeigen wir, dass die Spieler in keinem Gleichgewicht private Information während der Bildung der Allianz offenbaren. In diesem Fall existiert ein vereinigendes Gleichgewicht ohne Allianz, in dem die Spieler eine eindeutige, typen-abhängige Investition im Wettstreit wählen. Es existieren auch vereinigende Gleichgewichte, in welchen es alle Spieler-Typen strikt bevorzugen, in eine Allianz einzutreten. Falls eine Allianz seitens eines Spielers mit positiver Wahrscheinlichkeit erzwungen werden kann, existiert ein trennendes Gleichgewicht, in welchem nur die schwachen Spieler-Typen in die Allianz eintreten wollen.
    Keywords: alliance formation,contest,incomplete information,free-riding,signalling
    JEL: C72 D72 D74 D82
    Date: 2015
  4. By: Alexander Zimper (Department of Economics, University of Pretoria); Wei Ma (Department of Economics, University of Pretoria)
    Abstract: The existing models of Bayesian learning with multiple priors by Marinacci (2002) and by Epstein and Schneider (2007) formalize the intuitive notion that ambiguity should vanish through statistical learning in an one-urn environment. Moreover, the multiple priors decision maker of these models will eventually learn the ``truth". To accommodate non vanishing violations of Savage's (1954) sure-thing principle, as reported in Nicholls et al. (2015), we construct and analyze a model of Bayesian learning with multiple priors for which ambiguity does not necessarily vanish. Our decision maker only forms posteriors from priors that pass a plausibility test in the light of the observed data in the form of a ``gamma"-maximum expected loglikelihood prior-selection rule. The ``stubbornness" parameter "gamma" greater than equal to 1 determines the magnitude by which the expectation of the loglikelihood with respect to plausible priors can differ from the maximal expected loglikelihood. The greater the value of ``gamma" , the more priors pass the plausibility test to the effect that less ambiguity vanishes in the limit of our learning model.
    Keywords: Ambiguity, Bayesian Learning, Misspecified Priors, Berk's Theorem, Kullback-Leibler Divergence, Ellsberg Paradox
    JEL: C11 D81
    Date: 2015–06
  5. By: Jean-François Laslier (CNRS and Paris School of Economics); Matías Núñez (CNRS and THEMA, University of Cergy-Pontoise); Carlos Pimienta (School of Economics, UNSW Business School, UNSW)
    Abstract: We propose a two-player bargaining game where each player simultaneously proposes a set of lotteries on a finite set of alternatives. If the two sets have elements in common the outcome is selected by the uniform probability measure over the intersection. If otherwise the sets do not intersect the outcome is selected by the uniform probability measure over the union. We show that this game always has an equilibrium in sincere strategies (i.e. such that players truthfully reveal their preferences). We also prove that every equilibrium is individually rational and consensual. If furthermore players are partially honest then every equilibrium is efficient and sincere. We use this result to fully characterize the set of equilibria of the game under partial honesty.
    Keywords: Approval voting, bargaining, partial honesty, consensual equilibrium
    JEL: C70 C72
    Date: 2015–04
  6. By: Sambuddha Ghosh (Department of Economics, Boston university); Gabriele Gratton (School of Economics, UNSW Business School, UNSW); Caixia Shen (School of International Business Administration, Shanghai University of Finance and Economics)
    Abstract: Challenger demands a resource from Defender. In each period, Challenger chooses whether to attack; if attacked, Defender chooses whether to concede the resource forever. Each player might be committed to fighting until victory. Before conflict begins, Defender can make finitely many offers; conflict begins if Challenger rejects all offers. In equilibrium, all offers except the last are unacceptable. Negotiation cannot eliminate conflict because a larger offer makes conflict increasingly attractive for Challenger. If negotiation fails, prolonged conflict can happen in equilibrium, even when uncertainty is vanishingly small. We provide comparative statics regarding the probability and length of conflict.
    Keywords: Intimidation, reputation, terrorism, negotiation, brinkmanship, costly war-of-attrition
    JEL: D74 D82
    Date: 2015–04
  7. By: Morgan McClellon
    Abstract: Random utility representations of stochastic choice data on a finite set of alternatives are not necessarily unique. In fact, failures of uniqueness are shown here to be widespread: any random utility function with full support is nonunique. To restore uniqueness this paper introduces a finite state space and considers random choice over Savage acts. A representation is characterized in which acts are chosen according to the probability that they are optimal in every state. 
    Date: 2015–06
  8. By: Gardete, Pedro M. (Stanford University); Guo, Liang (Chinese University of Hong Kong)
    Abstract: We consider a model of strategic information transmission where a firm can communicate its quality to consumers through informative advertising. Our main result is that informative advertising claims can be credible even when the firm faces consumers with exante homogeneous preferences. A fundamental assumption of our model is that whether the product is available for purchase is independent of consumers' information acquisition efforts (i.e., search is discretionary). This assumption, in conjunction with the pricing problem of the firm, provides incentives for truth-telling. When quality is common knowledge, increases in quality lead to a higher market price. However, firm profit and consumer welfare are non-monotonic in product quality. The firm may be worse off with a better product because of increased consumer search and resulting preference heterogeneity. Consumers may also become worse off with a higher quality product when the option value of searching is low because in this case the firm raises price quickly in order to target consumers who do not search. Finally, when product quality is unknown but credible information is available, consumers become worse off with the probability of facing a high type firm because this firm is able to extract value from trade most effectively.
    Date: 2015–01
  9. By: Morgan McClellon
    Abstract: This paper studies random choice rules over finite sets that obey regularity but potentially fail to satisfy all of the Block-Marschak inequalities. Such random choice rules can be represented by non-additive random utility functions: that is, by capacities on the space of preferences. The higher-order Block-Marschak inequalities are shown to be related to the degree of monotonicity that can be achieved by a capacity representation. These results help to decipher the Block-Marschak inequalities, and are applied to study the relationship between random choice over finite sets and random choice over lotteries. 
    Date: 2015–06
  10. By: Chen, Yongmin; Riordan, Michael
    Abstract: We develop a new approach to discrete choice demand for differentiated products, using copulas to separate the marginal distribution of consumer values for product varieties from their dependence relationship, and apply it to the issue of how preference dependence affects market outcomes in symmetric multiproduct industries. We show that greater dependence lowers prices and profits under certain conditions, suggesting that preference dependence is a distinct indicator of product differentiation. We also find new sufficient conditions for the symmetric multiproduct monopoly and the symmetric single-product oligopoly prices to be above or below the single-product monopoly price.
    Keywords: Product differentiation, discrete choice, copula, multiproduct industries.
    JEL: D4 L1
    Date: 2014–12
  11. By: Franke, Jörg; Leininger, Wolfgang; Wasser, Cédric
    Abstract: We characterize revenue maximizing head starts for all-pay auctions and lottery contests with many heterogeneous players. We show that under optimal head starts all-pay auctions revenue-dominate lottery contests for any degree of heterogeneity among players. Moreover, all-pay auctions with optimal head starts induce higher revenue than any multiplicatively biased all-pay auction or lottery contest. While head starts are more effective than multiplicative biases in all-pay auctions, they are less effective than multiplicative biases in lottery contests.
    Abstract: Wir charakterisieren die erlösmaximierende Gewährung eines "Vorsprungs" für heterogene Spieler in All-Pay Auktionen und stochastischen Wettstreiten. Wir zeigen, dass der optimale Gebrauch von Vorteilsgewährung durch Einräumen eines Vorsprungs in All-Pay Auktionen immer; d.h. für jeden Grad von Heterogenität unter den Wettstreitern zu höheren Erlösen führt als bei stochastischen Wettstreiten. Darüber hinaus ist Vorsprungsgewährung in All-Pay Auktionen ein effektiveres Mittel zur Erlösmaximierung als das multiplikative Gewichten von Einsätzen. Optimale Vorsprungsgewährung führt in All-Pay Auktionen zu höheren Erlösen als optimales Gewichten, in stochastischen Wettstreiten ist es jedoch umgekehrt.
    Keywords: all-pay auction,lottery contest,head start,revenue dominance
    JEL: C72 D72
    Date: 2014
  12. By: Jonathan Donier; Jean-Philippe Bouchaud
    Abstract: In standard Walrasian auctions, the price of a good is defined as the point where the supply and demand curves intersect. Since both curves are generically regular, the response to small perturbations is linearly small. However, a crucial ingredient is absent of the theory, namely transactions themselves. What happens after they occur? To answer the question, we develop a dynamic theory for supply and demand based on agents with heterogeneous beliefs. When the inter-auction time is infinitely long, the Walrasian mechanism is recovered. When transactions are allowed to happen in continuous time, a peculiar property emerges: close to the price, supply and demand vanish quadratically, which we empirically confirm on the Bitcoin. This explains why price impact in financial markets is universally observed to behave as the square root of the excess volume. The consequences are important, as they imply that the very fact of clearing the market makes prices hypersensitive to small fluctuations.
    Date: 2015–06

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