nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒08‒30
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Optimal Taxation with Behavioral Agents By Emmanuel Farhi; Xavier Gabaix
  2. Competition for Attention By Pedro Bordalo; Andrei Shleifer
  3. Instability of Equilibria with Imperfect Private Monitoring By Heller, Yuval
  4. Efficiency and Information Transmission in Bilateral Trading By Robert Shimer; Iván Werning
  5. Contracting on Networks By Mohamed Belhaj; Frédéric Deroïan
  6. Multiproduct Monopoly Made Simple By Mark Armstrong; John Vickers
  7. Deliberation and Security Design in Bankruptcy By Eraslan, Hulya; Mylovanov, Tymofiy; Yilmaz, Bilge
  8. A Search Theory of Retail Market Structure By Jidong Zhou; Andrew Rhodes
  9. Doubts and Dogmatism in Conflict Behavior By Sidartha Gordon; Alessandro Riboni
  10. Cost Reduction can Decrease Prot and Welfare in a Monopoly By Ryoma Kitamura
  11. Mechanisms for Combinatorial Auctions with Budget Constraints By Le, Phuong
  12. Uniqueness of Stationary Equilibrium Payoffs in the Baron-Ferejohn Model with Risk Averse Players By Eraslan, Hulya
  13. Informational lobbying and agenda distortion By Christopher Cotton; Arnaud Dellis
  14. Improving Efficiency Using Reserve Prices: An Equilibrium Analysis of Core-Selecting Auctions By Ryuji Sano
  15. Some Unpleasant Bargaining Arithmetic? By Eraslan, Hulya; Merlo, Antonio
  16. Efficiency and strategy-proofness in object assignment problems with multi demand preferences By Tomoya Kazumura; Shigehiro Serizawa
  17. Equilibrium Price Dispersion Across and Within Stores By Guido Menzio; Nicholas Trachter
  18. Networks of many public goods with non-linear best replies By Yann Rébillé; Lionel Richefort
  19. Strategic Formation of Customer Relationship Networks By Sonja Brangewitz; Claus-Jochen Haake; Philipp Moehlmeier
  20. Equilibrium Payoffs for Pure Strategies in Repeated Games By Mitri Kitti

  1. By: Emmanuel Farhi; Xavier Gabaix
    Abstract: This paper develops a theory of optimal taxation with behavioral agents. We use a general behavioral framework that encompasses a wide range of behavioral biases such as misperceptions, internalities and mental accounting. We revisit the three pillars of optimal taxation: Ramsey (linear commodity taxation to raise revenues and redistribute), Pigou (linear commodity taxation to correct externalities) and Mirrlees (nonlinear income taxation). We show how the canonical optimal tax formulas are modified and lead to a rich set of novel economic insights. We also show how to incorporate nudges in the optimal taxation frameworks, and jointly characterize optimal taxes and nudges. We explore the Diamond-Mirrlees productive efficiency result and the Atkinson-Stiglitz uniform commodity taxation proposition, and find that they are more likely to fail with behavioral agents.
    Date: 2015–01
  2. By: Pedro Bordalo; Andrei Shleifer
    Abstract: We present a model of market competition in which consumers? attention is drawn to the products? most salient attributes. Firms compete for consumer attention via their choices of quality and price. Strategic positioning of a product affects how all other products are perceived. With this attention externality, depending on the cost of producing quality some markets exhibit ?commoditized? price salient equilibria, while others exhibit ?de-commoditized? quality salient equilibria. When the costs of quality change, innovation can lead to radical shifts in markets, as in the case of decommoditization of the coffee market by Starbucks. In the context of financial innovation, the model generates the phenomenon of ?reaching for yield?.
  3. By: Heller, Yuval
    Abstract: Various papers have presented folk-theorem results that yield efficiency in the repeated Prisoner's Dilemma with imperfect private monitoring. I present a mild equilibrium refinement that requires robustness against small perturbations in the behavior of potential opponents, and I show that only defection satisfies this mild refinement among all the equilibria in the existing literature, unless one assumes either (1) communication among the players, or (2) sufficient correlation between the private signals (conditional on the action-profile).
    Keywords: Belief-free equilibrium, evolutionary stability, imperfect private monitoring, repeated Prisoner's Dilemma, communication.
    JEL: C73 D82
    Date: 2015–08–08
  4. By: Robert Shimer; Iván Werning
    Abstract: We study pairwise trading mechanisms in the presence of private information and limited commitment, whereby either trader can walk away from a proposed trade when he learns the trading price. We show that when one trader's information is relevant for the other trader's value of the asset, optimal trading arrangements may necessarily conceal the traders' information. While limited commitment itself may not be costly, it shapes how prices transmit information.
    JEL: D82 D83 G14
    Date: 2015–08
  5. By: Mohamed Belhaj (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université); Frédéric Deroïan (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université)
    Abstract: A principal offers bilateral contracts to a set of agents organized in a network conveying synergies, in a context where agents' efforts are observable and where the principal's objective increases with the sum of efforts. We characterize optimal contracts as a function of agents' positions on the network. The analysis shows that contract enforceability is key to understand optimality. We also examine linear contracting and we analyze the situation where the principal is constrained to contract with a single agent on the network. Last, we extend this setting to network entry.
    Date: 2015–01
  6. By: Mark Armstrong; John Vickers
    Abstract: We present a tractable class of multiproduct monopoly models that involve a generalized form of homothetic preferences. This class includes CES, linear and logit demand. Within the class, profit-maximizing quantities are proportional to efficient quantities. We discuss cost-passthrough, including cases where optimal prices do not depend on other products’costs. We show how the analysis can be extended to Cournot oligopoly. Finally, we discuss optimal monopoly regulation when the firm has private information about its vector of marginal costs, and show that if the probability distribution over costs satisfies an independence property, then optimal regulation leaves relative price decisions to the firm.
    Keywords: Multiproduct pricing, homothetic preferences, cost passthrough, monopoly regulation, multidimensional screening.
    JEL: D42 D82 L12 L51
    Date: 2015–08–20
  7. By: Eraslan, Hulya (Rice University); Mylovanov, Tymofiy (University of Pittsburgh); Yilmaz, Bilge (University of PA)
    Abstract: We consider negotiations among the claimants of a bankrupt firm in which claimants have private information about various operational restructuring alternatives, and can communicate prior to a proposal. Our setup differs from typical bargaining games with incomplete information in two ways. First, the proposals can be made using securities. Second, the negotiations are over two interdependent issues: what to do with the firm and who gets what. In line with Chapter 11 bankruptcy proceedings we first analyze the case in which both issues are negotiated simultaneously. We show that simultaneous negotiation leads to efficient operational restructuring. Moreover, any efficient equilibrium requires that the original senior claimants receive senior securities of the reorganized firm. Next, we analyze the cases in which the two issues are negotiated sequentially. If the first issue is what to do with the firm, then efficient operational restructuring is not possible. In contrast, if the first issue is who gets what, then sequential negotiation is efficient. In comparison to simultaneous negotiation, efficient sequential negotiation may result in junior claimant capturing a larger surplus.
    Date: 2014–08
  8. By: Jidong Zhou (NYU Stern School of Business); Andrew Rhodes (Toulouse School of Economics)
    Abstract: This paper studies how consumer multiproduct shopping and search frictions jointly affect retail market structure. Single-product shops with different products can merge to form a multiproduct retailer. By doing this, they provide one-stop shopping convenience and thus attract more consumers. However, the conglomerate merger also changes the market structure and affects price competition. We fiÂÂ…nd that an asymmetric market structure with one multiproduct retailer and smaller single-product competitors often leads to the weakest price competition. We solve for the equilibrium market structure, and show that it is asymmetric whenever the search friction is not too high. Conglomerate merger which leads to such an asymmetric market structure often raises market prices and harms consumers. Due to the endogeneity of the market structure, reducing the search friction does not necessarily induce lower market prices and higher consumer welfare.
    Date: 2015
  9. By: Sidartha Gordon (ECON - Département d'économie - Sciences Po); Alessandro Riboni (Department of Economics, Ecole Polytechnique - CNRS - Polytechnique - X)
    Abstract: Conflicts are likely less violent if individuals entertain the possibility that the opponent may be right. Why is it so difficult to observe this attitude? In this paper, we consider a game of conflict where two opponents fight in order to impose their preferred policy. Before entering the conflict, one opponent (the agent) trusts the information received by his principal. The principal wants to a↵ect the agent's e↵ort, but he also cares that the agent selects the correct policy and that he has the right incentives to acquire information.We find conditions under which the principal induces hawkish attitudes in the agent. As a result, the agent has no doubts about the optimality of his preferred policy, conflicts are violent and bad decisions are sometimes made. Under some other conditions, the agent adopts dovish attitudes of systematic doubt and conflicts are less violent.
    Date: 2014–04
  10. By: Ryoma Kitamura (Graduate School of Economics, Kwansei Gakuin University)
    Abstract: This paper develops a monopoly model in which two vertically differentiated goods are supplied and involve a within-product network externality. Within this model, I examine how the cost of the high-quality good affects the firm’s profit and welfare, demonstrating a surprising result that both the profit and welfare are U-shaped in the cost and thus, in particular, a decrease in the marginal cost can reduce the monopoly profit. I show that the assumptions of the fulfilled expectations equilibrium and multi-product monopoly lead to this counter intuitive possibility. Furthermore, changes in production costs and in quality yield cannibalization such that the consumption of one good increases while that of the other decreases.
    Keywords: Multi-product firm, Monopoly, Cannibalization, Network externality
    JEL: D21 D42 L12 L15
    Date: 2015–07
  11. By: Le, Phuong
    Abstract: This paper studies combinatorial auctions with budget-constrained bidders from a mechanism design perspective. I search for mechanisms that are incentive compatible, individually rational, symmetric, non-wasteful and non-bossy. First focusing on the greedy domain, in which any increase in a bidder's valuation always exceeds his budget, I derive the unique mechanism, called the Iterative Second Price Auction. For the general domain, however, no such mechanism exists.
    Keywords: Combinatorial Auctions, Budget Constraints, Mechanisms
    JEL: D44
    Date: 2015–07–11
  12. By: Eraslan, Hulya (Rice University)
    Abstract: I study a multilateral sequential bargaining model among risk averse players in which the players may differ in their probability of being selected as the proposer and the rate at which they discount future payoffs. For games in which agreement requires less than unanimous consent, I characterize the set of stationary subgame perfect equilibrium payoffs. With this characterization, I establish the uniqueness of the equilibrium payoffs. For the case where the players have the same discount factor, I show that the payoff to a player is nondecreasing in his probability of being selected as the proposer. For the case where the players have the same probability of being selected as the proposer, I show that the payoff to a player is nondecreasing in his discount factor. This generalizes Eraslan [2002] by allowing the players to be risk averse.
    Date: 2015–05
  13. By: Christopher Cotton (Queen's University); Arnaud Dellis (UQAM)
    Abstract: We challenge the prevailing view that pure informational lobbying (in the absence of political contributions and evidence distortion or withholding) leads to better informed policymaking. In the absence of lobbying, the policymaker may prioritize the more-important or ex ante more-promising issues. Recognizing this, interest groups involved with other issues can have an incentive to lobby, in order to change the issues that the policymaker learns about and prioritize. We identify two channels through which informational lobbying is detrimental, in the sense of leading to worse policy and possibly less-informed policy choices. First, it can cause the policymaker to give priority to less important issues with active lobbies, rather than the issues that are more-important to his constituents. Second, lobbying by interest groups on issues with ex ante less-promising reforms may crowd out information collection by the policymaker on issues with more-promising reforms. The analysis fully characterizes the set of detrimental lobbying equilibria under two alternative types of issue asymmetry.
    Keywords: Lobbying, agenda setting, information collection, persuasion, information crowd out, political influence, interest groups
    JEL: D72 D78 D83
    Date: 2015–08
  14. By: Ryuji Sano (Institute of Economic Research, Kyoto University)
    Abstract: This study analyzes the equilibrium of core-selecting auctions under incomplete information. We consider the ascending proxy auction of Ausubel and Milgrom (2002) in a stylized environment with two goods and three bidders: two local and one global. Because of the free-riding incentive, local bidders with a sufficiently low value submit a zero bid. In contrast, they submit almost truthfully if the value is sufficiently high. We also provide equilibrium with reserve prices, and show that a reserve price for local bidders improve both allocative efficiency and revenue in equilibrium.
    Keywords: core-selecting auctions, ascending proxy auction, reserve price
    JEL: D44
    Date: 2015–07
  15. By: Eraslan, Hulya (Rice University); Merlo, Antonio (Rice University)
    Abstract: It is commonly believed that, since unanimity rule safeguards the rights of each individual, it protects minorities from the possibility of expropriation, thus yielding more equitable outcomes than majority rule. We show that this is not necessarily the case in bargaining environments. We study a multilateral bargaining model a la Baron and Ferejohn (1989), where players are heterogeneous with respect to the potential surplus they bring to the bargaining table. We show that unanimity rule may generate equilibrium outcomes that are more unequal (or less equitable) than under majority rule. In fact, as players become perfectly patient, we show that the more inclusive the voting rule, the less equitable the equilibrium allocations.
    JEL: C78 D70
    Date: 2014–08
  16. By: Tomoya Kazumura; Shigehiro Serizawa
    Abstract: Consider the problem of allocating objects to agents and how much they should pay. Each agent has a preference relation over pairs of a set of objects and a payment. Preferences are not necessarily quasi-linear. Non-quasi-linear preferences describe environments where payments influence agents' abilities to utilize objects. This paper is to investigate the possibility of designing efficient and strategy-proof rules in such environments. A preference relation is single demand if an agent wishes to receive at most one object; it is multi demand if whenever an agent receives one object, an additional object makes him better off. We show that if a domain contains all the single demand preferences and at least one multi demand preference relation, and there are more agents than objects, then no rule satisfies efficiency, strategy-proofness, individual rationality, and no subsidy for losers on the domain.
    Date: 2015–08
  17. By: Guido Menzio; Nicholas Trachter
    Abstract: We develop a search-theoretic model of the product market that generates price dispersion across and within stores. Buyers differ with respect to their ability to shop around, both at different stores and at different times. The fact that some buyers can shop from only one seller while others can shop from multiple sellers causes price dispersion across stores. The fact that the buyers who can shop from multiple sellers are more likely to be able to shop at inconvenient times (e.g., on Monday morning) causes price dispersion within stores. Specifically, it causes sellers to post different prices for the same good at different times in order to discriminate between different types of buyers.
    JEL: D43
    Date: 2015–08
  18. By: Yann Rébillé; Lionel Richefort
    Abstract: We model a bipartite network in which links connect agents with public goods. Agents play a voluntary contribution game in which they decide how much to contribute to each public good they are connected to. We show that the problem of finding a Nash equilibrium can be posed as a non-linear complementarity one. The existence of an equilibrium point is established for a wide class of individual preferences. We then find a simple sufficient condition, on network structure only, that guarantees the uniqueness of the equilibria, and provide an easy procedure for building networks that respects this condition.
    Date: 2014–10–15
  19. By: Sonja Brangewitz (University of Paderborn); Claus-Jochen Haake (University of Paderborn); Philipp Moehlmeier (Bielefeld University)
    Abstract: We analyze the stability of networks when two intermediaries strategically form costly links to customers. We interpret these links as customer relationships that enable trade to sell a product. Equilibrium prices and equilibrium quantities on the output as well as on the input market are determined endogenously for a given network of customer relationships. We investigate in how far the substitutability of the intermediaries' products and the costs of link formation influence the intermediaries' equilibrium profits and thus have an impact on the incentives to strategically form relationships to customers. For networks with three customers we characterize locally stable networks, in particular existence is guaranteed for any degree of substitutability. Moreover for the special cases of perfect complements, independent products and perfect substitutes, local stability coincides with the stronger concept of Nash stability. Additionally, for networks with n customers we analyze stability regions for selected networks and determine their limits when n goes to infinity. It turns out that the shape of the stability regions for those networks does not significantly change compared to a setting with a small number of customers.
    Keywords: Network Formation, Product Differentiation, Oligopoly, Quantity Competition
    JEL: C70 D43 D85 L13
    Date: 2015–05
  20. By: Mitri Kitti (Department of Economics, University of Turku)
    Abstract: Equilibrium payoffs corresponding to subgame perfect equilibria in pure strategies are characterized for infinitely repeated games with discounted payoffs. The equilibrium payoff set of a game is a fixed-point of set-valued operators introduced in the paper. The new operator formalism is utilized in showing the folk theorem for repeated games with unequal but constant discount rates. When the players become more patient, the equilibrium payoff set converges to the fixed-point of an asymptotic operator. This limit set corresponds to the subgame perfect equilibria of a continuous-time repeated game. It is shown that the limit set is convex, which implies that pure strategies are sufficient in obtaining all payoffs in the limit. However, this set differs from the set of all feasible and individually rational payoffs, when the discount rates are not equal. The limit sets for constant discount rates can be used in analyzing the outer limit of equilibrium payoffs when the discount factors increase but discount rates are not fixed.
    Keywords: repeated game, equilibrium payoff set, folk theorem, unequal discount rates, continuous-time game
    JEL: C72 C73
    Date: 2014–12

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