nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒10‒10
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Public-Good Provision in Large Economies By Felix J. Bierbrauer; Martin F. Hellwig
  2. The Limits of Price Discrimination By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  3. First-Order and Second-Order Ambiguity Aversion By Matthias Lang
  4. Trading Networks with Bilateral Contracts By Tam\'as Fleiner; Zsuzsanna Jank\'o; Akihisa Tamura; Alexander Teytelboym
  5. Relative Injustice Aversion By Luis José Blas Moreno Garrido
  6. Competition and Auctioning Licenses By Chatterjee, Rittwik; Chattopadhyay, Srobonti
  7. Experience Transmission : Truth-telling Adoption in Matching By Christophe Bravard; Liza Charroin
  8. On the Existence of Nash Equilibrium in Bayesian Games By Oriol Carbonell-Nicolau; Richard McLean
  9. Exclusive Contracts with Complementary Inputs By Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
  10. Competitive pricing strategies in social networks By Chen, Ying-Ju; Zenou, Yves; Zhou, Junjie
  11. Observability and Endogenous Organizations By Gabriel de Abreu Madeira
  12. Modeling a Satisficing Judge By Christoph Engel; Werner Güth
  13. On dynamic games with randomly arriving players By Pierre Bernhard; Marc Deschamps
  14. Gresham's Law of Model Averaging By In-Koo Cho
  15. Equilibrium in insurance markets with adverse selection when insurers pay policy dividends By Pierre Picard
  16. Bilateral exchange and competitive equilibrium By Flåm, Sjur Didrik
  17. Reputation Cycles By Julien Prat; Boyan Jovanovic
  18. Can a Platform Make Profit with Consumer' Mobility? A Two-Sided Monopoly Model with Random Endogenous Side-Swiching By Pierre Andreoletti; Pierre Gaze; Maxime Menuet
  19. Solving Collective Action Poblems in a Political Economy Model of Social Polarization and Conflict By Ernesto Cardenas Prieto
  20. Researcher's Dilemma By Bobtcheff, Catherine; Bolte, Jérôme; Mariotti, Thomas

  1. By: Felix J. Bierbrauer (University of Cologne, Chair for Public Economics CMR – Center for Macroeconomic Research); Martin F. Hellwig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: In a large economy, a first-best provison rule for a public good is robustly implementable with budget balance because no one individual alone can affect the aggregate outcome. First-best outcomes can, however, be blocked by coalitions of agents acting in concert. With a requirement of immunity against robustly blocking coalitions, we find that, for a pubic good that come as a single indivisible unit, a monotonic social choice function cannot condition on preference intensities but only on the population shares of people favoring one outcome over another. Any such social choice function can be implemented by a simple voting mechanism. With more public-good provision levels, more complicated mechanisms are required, but they still involve the counting of votes rather than an assessment of benefits. Monotonicity and immunity against robust blocking thus provide a foundation for the use of voting mechanisms.
    Keywords: Mechanism Design, Public-good provision, Large Economy, Voting Mechanisms, Robust Incentive Compatibility, Immunity against Robustly Blocking Coalitions, Monotonic Social Choice Functions
    JEL: D82 H41 D70 D60
    Date: 2015–09
  2. By: Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, Princeton University); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: We analyze the welfare consequences of a monopolist having additional information about consumers' tastes, beyond the prior distribution; the additional information can be used to charge different prices to different segments of the market, i.e., carry out "third degree price discrimination." We show that the segmentation and pricing induced by the additional information can achieve every combination of consumer and producer surplus such that: (i) consumer surplus is non-negative, (ii) producer surplus is at least as high as profits under the uniform monopoly price, and (iii) total surplus does not exceed the surplus generated by efficient trade.
    Keywords: First degree price discrimination, Second degree price discrimination, Third degree price discrimination, Private information, Privacy, Bayes correlated equilibrium, Concavification
    JEL: C72 D82 D83
    Date: 2013–05
  3. By: Matthias Lang (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Different models of uncertainty aversion imply strikingly different economic behavior. The key to understanding these differences lies in the dichotomy between first-order and second-order ambiguity aversion which I define here. My definition and its characterization are independent of specific representations of decisions under uncertainty. I show that with second-order ambiguity aversion a positive exposure to ambiguity is optimal if and only if there is a subjective belief such that the act’s expected outcome is positive. With first-order ambiguity aversion, zero exposure to ambiguity can be optimal. Examples in finance, insurance and contracting demonstrate the economic relevance of this dichotomy.
    Keywords: Uncertainty Aversion, Ambiguity, Smooth Ambiguity Aversion, Sub-jective Beliefs, Kinked preferences
    JEL: D82 D01 D81 G11
    Date: 2015–09
  4. By: Tam\'as Fleiner; Zsuzsanna Jank\'o; Akihisa Tamura; Alexander Teytelboym
    Abstract: We consider general networks of bilateral contracts that include supply chains. We define a new stability concept, called trail stability, and show that any network of bilateral contracts has a trail-stable outcome whenever agents' preferences satisfy full substitutability. Trail stability is a natural extension of chain stability, but is a stronger solution concept in general contract networks. Trail-stable outcomes are not immune to deviations of arbitrary sets of firms. In fact, we show that outcomes satisfying an even more demanding stability property -- full trail stability -- always exist. We pin down conditions under which trail-stable and fully trail-stable outcomes have a lattice structure. We then completely describe the relationships between all stability concepts. When contracts specify trades and prices, we also show that competitive equilibrium exists in networked markets even in the absence of fully transferrable utility. The competitive equilibrium outcome is trail-stable.
    Date: 2015–10
  5. By: Luis José Blas Moreno Garrido (Dpto. Métodos Cuantitativos y Teoría Económica)
    Abstract: I propose a new utility function based on the relative aversion to injustice to explain why, in bargaining games, neither classical equilibria nor inequality aversion equilibria hold when money is not windfall, but it is the result of the effort. This utility function generalizes the concept of inequality aversion when agents have beliefs about what they deserve, and it is able to explain rejections in non zero-sum games. I analyze the agents' behavior and their bargaining power in the dictator game, ultimatum game and (0,1)-ultimatum game and results are compared within those games.
    Keywords: Injustice Aversion, Distribution, Property Rights, Bargaining power
    JEL: D3 D63 D64 P14
    Date: 2015–09
  6. By: Chatterjee, Rittwik; Chattopadhyay, Srobonti
    Abstract: Promoting competition in domestic markets is very often an important policy concern of governments in context of developmental objectives. Direct government intervention of different forms to promote competition becomes all the more necessary especially in the markets that have higher tendencies to concentrate. For example, in the market for telecom spectrum licenses, many countries impose ceilings on the number of licenses that a single individual company can possess. It is commonly believed that in the markets where permission from government is required for fresh operation or expansion of operation, e.g. through licenses, larger number of licenses lead to higher competition. But some earlier literature show that increasing the number of licenses might actually be detrimental to competition contrary to popular belief. This paper considers a situation where there is an incumbent monopolist in a market; the government is auctioning two new licenses, one for this same market and another one for a completely new market where no firm had been operating so far. A number of potential entrants are willing to bid for both the licenses. The incumbent firm is allowed to purchase only one of these licenses. If it purchases the license for its own market it can retain its monopoly position. The selling procedure dictates that only the potential entrants will be bidding and in order to purchase the license in its existing market, the incumbent monopolist has to match the highest bid in that auction. Alternatively, it can bid for the entry license for the new market. This paper tries to identify under what conditions the incumbent firm will bid for the outside market. It also tries to find under what conditions providing some other options to the incumbent firm leads to increased competition in the existing market, thus contributing to developmental prospects by enhancing social welfare.
    Keywords: Auction, Competition, Licensing
    JEL: D44
    Date: 2015–09–19
  7. By: Christophe Bravard (Université Grenoble 2, UMR 1215 GAEL, F38000 Grenoble, France; CNRS, GATE Lyon-St Etienne, F-42000, France); Liza Charroin (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon Saint-Etienne, Ecully, F-69130, France; Université Lyon 2, Lyon, F-69007, France)
    Abstract: Networks facilitate the exchange of goods and information and create benefits. We consider a network composed of complementary nodes, i.e., nodes that need to be connected to generate a positive payoff. This network may face intelligent attacks on links. To study how the network should be designed, we develop a strategic model, inspired by Dziubiński and Goyal (2013), with two players : a Designer and an Adversary. The Designer has two potential ways to defend her network : forming destructible links among the given set of nodes to increase connectivity or protecting a group of nodes (with indestructible links). Links formation and protections (indestructible links) are costly. The Adversary then allocates her resources to attack links. We examine two situations which differ according to the number of protections available to the Designer. Our main findings are that if the number of protections is not limited, the Designer should either protect all the nodes, or create a large number of (destructible) links to absorb the Adversary’s attack ; if the available number of protections is limited, then a strategy that uses protections and links can be the equilibrium.
    Keywords: Networks, Network defense, Network design, Attacks on links
    JEL: D74 D85
    Date: 2015
  8. By: Oriol Carbonell-Nicolau (Rutgers University); Richard McLean (Rutgers University)
    Abstract: We furnish conditions on the primitives of a Bayesian game that guarantee the existence of a Bayes-Nash equilibrium. By allowing for payoff discontinuities in actions, we cover various applications that cannot be handled by extant results.
    Keywords: discontinuous game, infinite game of incomplete information, behavioral strategy, distributional strategy, payoff security
    JEL: C72
    Date: 2015–10–06
  9. By: Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
    Abstract: This study constructs a model of anticompetitive exclusive contracts in the presence of complementary inputs. A downstream firm transforms multiple complementary inputs into final products. When complementary input suppliers have market power, upstream competition within a given input market benefits not only the downstream firm (by lowering the input price) but also complementary input suppliers (by raising complementary input prices). The downstream firm is thus unable to earn higher profits even when socially efficient entry is allowed. Hence, the inefficient incumbent supplier can deter socially efficient entry by using exclusive contracts even in the absence of economies of scale and downstream competition. These results have important implications for antitrust agencies, showing the importance of considering the existence of complementary inputs when examining cases of potential anticompetitive exclusive dealing.
    Date: 2015–01
  10. By: Chen, Ying-Ju; Zenou, Yves; Zhou, Junjie
    Abstract: We study pricing strategies of competing firms who sell heterogeneous products to a group of customers in a social network. Goods are substitutes and each customer gains network externalities from her neighbors who consume the same products. We show that there is a unique subgame-perfect equilibrium where, first, firms choose the prices of each good for each consumer, and, then, individuals decide their consumption of the goods. We also fully characterize the equilibrium prices for any network structure, and relate these equilibrium outcomes to the familiar Katz-Bonacich network centrality measures. Contrary to the monopoly case, the equilibrium price of a customer not only depends on her own characteristics but also on others' characteristics. We show that firms price discriminate and charge lower prices to more central consumers. This means that more central consumers obtain a larger discount because of their impact in terms of consumption on their neighbors. We also show that the firms' equilibrium profits can decrease when either the network becomes denser or network effects are higher.
    Keywords: competition; differentiated products; pricing; social networks
    JEL: D43 D85 L13 L14
    Date: 2015–10
  11. By: Gabriel de Abreu Madeira
    Abstract: This paper establishes a relationship between the observability of common shocks and optimal organizational design in a multiagent moral hazard environment. We consider two types of organizations, namely relative-performace and cooperative regimes, and show that, with sufficient information regarding common shocks, a cooperative organization can be optimal even if outputs are highly correlated. The model is then embedded in a Walrasian general equilibrium model in which choices regarding organizations and investment in information on common shocks are jointly determined. Numerical results reveal that both cooperative and relative-performance regimes can coexist in equilibrium but only cooperative organizations invest in full observability of common shocks. Changes in the cost of information and aggregate wealth can affect substantially the types of organizations operating and the matching patterns of heterogeneous agents in these organizations. General equilibrium effects are key in determining how information costs impact on the way production is organized.
    Keywords: organizational design; observability; relative performance regime; group regime; general equilibrium; value of information
    JEL: D23 D71 D85 O17
    Date: 2015–10–05
  12. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn); Werner Güth (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Judges and juries frequently must decide, knowing that they do not know everything that would be relevant for deciding the case. The law uses two related institutions for enabling courts to nonetheless decide the case: the standard of proof, and the burden of proof. In this paper, we contrast a standard rational choice approach with a satisficing approach. Standard theory would want judges to rationally deal with the limitations of the evidence. We posit that this is not only descriptively implausible, but also normatively undesirable. We propose a theoretical framework for a judge who only considers scenarios that "she does not dare to neglect", and aims at decisions that are "good enough", given the undissolvable limitations of the evidence. We extend this approach to parties who strategically exploit the limited factual basis, and to judges who have to allocate limited resources for fact finding to more than one case.
    JEL: D82 C72 D81 K41 D03
    Date: 2015–10
  13. By: Pierre Bernhard (BIOCORE team, INRIA Sophia Antipolis-Méditerranée); Marc Deschamps (CRESE, BETA-CNRS and OFCE-Sciences Po., Univ. Bourgogne Franche-Comté)
    Abstract: We consider a dynamic game where additional players (assumed identical, even if there will be a mild departure from that hypothesis) join the game randomly according to a Bernoulli process. The problem solved here is that of computing their expected payoff as a function of time and the number of players present when they arrive, if the strategies are given. We consider both a finite horizon game and an infinite horizon, discounted game. As illustrations, we discuss some examples relating to oligopoly theory (Cournot, Stackelberg, cartel).
    Keywords: Dynamic game, Bernoulli process of entry, Oligopoly
    JEL: C72 C61 D21 L13
    Date: 2015–09
  14. By: In-Koo Cho (University of Illinois)
    Abstract: An agent operating in a self-referential environment thinks the parameters of his model might be time-varying. In response, he estimates two models, one with time-varying parameters, and another with constant parameters. Forecasts are then based on a Bayesian Model Averaging strategy, which mixes forecasts from the two models. In reality, structural parameters are constant, but the (unknown) true model features expectational feedback, which the agent's reduced form models neglect. This feedback allows the agent's fears of parameter instability to be self-confirming. Within the context of a standard linear present value asset pricing model, we use the tools of large deviations theory to show that the agent's self-confirming beliefs about parameter instability exhibit Markov-switching dynamics between periods of tranquility and periods of instability. However, as feedback increases, the duration of the unstable state increases, and instability becomes the norm. Even though the constant parameter model would converge to the (constant parameter) Rational Expectations Equilibrium if considered in isolation, the mere presence of an unstable alternative drives it out of consideration.
    Date: 2015
  15. By: Pierre Picard (Département économie - Ecole Polytechique)
    Abstract: We show that an equilibrium always exists in the Rothschild-Stiglitz insurance market model with adverse selection and an arbitrary number of risk types, when insurance contracts include policy dividend rules. The Miyazaki-WilsonSpence state-contingent allocation is an equilibrium allocation, and it is the only one when out-of-equilibrium beliefs satisfy a robustness criterion. It is shown that stock insurers and mutuals may coexist, with stock insurers o⁄ering insurance coverage at actuarial price and mutuals cross-subsidizing risks.
    Keywords: Participating Contract, Policy Dividend.,Insurance, Adverse Selection, Mutual
    Date: 2015–09–01
  16. By: Flåm, Sjur Didrik (Department of Economics, University of Bergen, Norway)
    Abstract: Motivated by computerized markets, this paper considers direct exchange between matched agents, just two at a time. Each party holds a "commodity vector”, and each seeks, whenever possible, a better holding. Focus is on feasible, voluntary exchanges, driven only by (projected) differences in generalized gradients. The paper plays down the importance of agents’ competence, experience and foresight. It also reduces the role of optimization, and it allows non-smooth data. Yet it identi…es reasonable conditions which suffice for convergence to competitive equilibrium.
    Keywords: bilateral exchange; convex preferences; competitive equilibrium; generalized gradients; transferable utility.
    JEL: C63 D03 D51
    Date: 2015–10–03
  17. By: Julien Prat (CREST); Boyan Jovanovic (New York University)
    Abstract: This paper shows that two-period cycles may arise endogenously when products are experience goods. Then firms invest in the quality of their output in order to establish a good reputation. Multiple equilibria arise because investment in reputation has a pecuniary external effect that works through the aggregate discount factor. Cycles are more likely to occur when information diffuses slowly and when agents are patient.
    Date: 2015
  18. By: Pierre Andreoletti (MAPMO - Mathématiques - Analyse, Probabilités, Modélisation - Orléans - CNRS - UO - Université d'Orléans); Pierre Gaze (LEO - Laboratoire d'Economie d'Orléans - CNRS - Université d'Orléans); Maxime Menuet (LEO - Laboratoire d'Economie d'Orléans - CNRS - Université d'Orléans)
    Abstract: We model a specific two-sided monopoly market in which agents can switch from a side to the other. We define two periods of time. In the first period, agents buy the platform services on each side and in the second period of time, they can possibly enhance their satisfaction by going to the other face of the platform. We analyze the link between mobility, consumer’s utility, prices and profit. We show that mobility is a valuable feature which can be compared with an increase of product quality. Finally, the firm is able to capture the mobility in its monopoly’s profit. The relative size of each group then appears as a strategical variable for the firm.
    Keywords: externalities,side-switching,two-sided markets
    Date: 2015
  19. By: Ernesto Cardenas Prieto (Faculty of Economics and Management, Pontificia Universidad Javeriana Cali)
    Abstract: I use the concept of Stability Sets in order to analyze the probability of collective action taking place in a political-economy model characterizing a polarized society. In the model, society is composed of two social groups and I focus on how changes in the economic parameters of the model, underlying the political preferences of the groups, alter the probability for collective action to take place and move society from one equilibrium to the other of the two possible equilibria of the model.
    Keywords: Collective Action, Polarization, Social Conflict, Prices.
    JEL: D74 O12
    Date: 2015–07
  20. By: Bobtcheff, Catherine; Bolte, Jérôme; Mariotti, Thomas
    Abstract: We propose and analyze a general model of priority races. Researchers privately have breakthroughs and decide how long to let their ideas mature before disclosing them, thereby establishing priority. Two-researcher, symmetric priority races have a unique equilibrium that can be characterized by a differential equation. We study how the shape of the breakthrough distribution and of the returns to maturation affect maturation delays and research quality, both in dynamic and comparative-statics analyses. Making researchers better at discovering new ideas or at developing them has contrasted effects on research quality. Being closer to the technological frontier enhances the value of maturation for researchers, which mitigates the negative impact on research quality of the race for priority. Finally, when researchers differ in their abilities to do creative work or in the technologies they use to develop their ideas, more efficient researchers always let their ideas mature more than their less efficient opponents. Our theoretical results shed light on academic competition, patent races, and innovation quality.
    Keywords: priority races; private information
    JEL: C73 D82
    Date: 2015–10

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