nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒11‒01
ten papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Private Contracts in Two-Sided Markets By Gaston Llanes; Francisco Ruiz-Aliseda
  2. Media see-saws: Winners and losers on media platforms By Anderson, Simon P.; Peitz, Martin
  3. Prizes versus Contracts as Incentives for Innovation By Yeon-Koo Che; Elisabetta Iossa; Patrick Rey
  4. Deceptive Advertising with Rational Buyers By Salvatore Piccolo; Piero Tedeschi; Giovanni Ursino
  5. Entry with Two Correlated Signals By Alex Barrachina; Yair Tauman; Amparo Urbano
  6. Modeling Risk and Ambiguity-on-Nature in Normal-form Games By Jian Yang
  7. Optimal public information dissemination: Introducing observational learning into a generalized beauty contest By Hüning, Hendrik; Meub, Lukas
  8. Revealed preferences over risk and uncertainty By Matthew Polisson; John Quah; Ludovic Renou
  9. From Acquaintances to Friends: Homophily and Learning in Networks By Mihaela van der Schaar; Simpson Zhang
  10. Quality differences, third-degree price discrimination, and welfare By Franciso Galera; Pedro Mendi; Juan Carlos Molero

  1. By: Gaston Llanes (Escuela de Administracion, Pontificia Universidad Catolica de Chile); Francisco Ruiz-Aliseda (Escuela de Administracion, Pontificia Universidad Catolica de Chile)
    Abstract: We study a two-sided market in which a platform connects consumers and sellers, and signs private contracts with sellers. We compare this situation with a two-sided market with public contracts. We find that the platform provider sets positive (negative) royalties to sellers and earns a negative (positive) markup on consumers when contracts are private (public). Thus, private contracting has a significant effect on the price structure. Private contracting leads to lower platform profits, consumer surplus, and social welfare. We study the welfare effects of most-favored-nation clauses, price-forcing contracts, and integration with sellers; and relate our results with the agency model of sales. Our results indicate that enhancing the market power of a dominant platform over sellers may increase welfare because it acts as a commitment device for inducing lower seller prices, mitigating the hold-up problem borne by consumers when they cannot observe sellers' contracts.
    Keywords: Two-Sided Markets; Platforms; Vertical Relations; Most-Favored Nation; Price-Forcing Contracts; Resale Price Maintenance; Integration; Agency Model of Sales
    JEL: L12 L14 L42
    Date: 2015–09
  2. By: Anderson, Simon P.; Peitz, Martin
    Abstract: We customize the aggregative game approach to oligopoly to study asymmetric media markets. Advertiser, platform, and consumer surplus are tied together by a simple summary statistic. When media are ad-financed and ads are a nuisance to consumers we establish see-saws between consumers and advertisers. Entry of a lower-quality platform increases consumer surplus, but decreases advertiser surplus if industry platform profits decrease with entry. Merger decreases consumer surplus, but advertiser surplus increases when the profits of the higher-quality platform within the merger increase. By contrast, when platforms use two-sided pricing or consumers like advertising,advertiser and consumer interests are often aligned.
    Keywords: media economics , mergers , entry , advertising , aggregative games
    JEL: D43 L13
    Date: 2015
  3. By: Yeon-Koo Che (Department of Economics, Columbia University); Elisabetta Iossa (DEF and CEIS,University of Rome Tor Vergata, CEPR, IEFE-Bocconi and EIEF); Patrick Rey (Toulouse School of Economics, GREMAQ, IDEI and CEPR)
    Abstract: The procurement of an innovation involves motivating a research effort to generate a new idea and then implementing that idea efficiently. If research efforts are unverifiable and implementation costs are private information, a trade-off arises between the two objectives. The optimal mechanism resolves the tradeoff via two instruments: a monetary prize and a contract to implement the project. The optimal mechanism favors the innovator in contract allocation when the value of innovation is above a certain threshold, and handicaps the innovator in contract allocation when the value of innovation is below that threshold. A monetary prize is employed as an additional incentive but only when the value of innovation is sufficiently high.
    Keywords: Contract rights, Inducement Prizes, Innovation, Procurement and R&D.
    JEL: D44 H57 D82 O31 O38 O39
    Date: 2015–10–22
  4. By: Salvatore Piccolo (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Piero Tedeschi (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Giovanni Ursino (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: We study a game in which two competing sellers supplying experience goods of different quality can induce a perspective buyer into a bad purchase through (costly) deceptive advertising. We characterize the equilibrium set of the game and argue that an important class of these outcomes features pooling behavior at the pricing stage while requiring low quality sellers to air false claims about their product. These claims deceive the buyer and induce a bad purchase with positive probability. Although the low-quality product is purchased with positive probability in these equilibria, the buyer's (expected) utility can be higher than in a fully separating equilibrium. This result suggests that, surprisingly, deceptive practices may actually enhance competition. Finally, we characterize the optimal deterrence by a regulatory agency that seeks to punish deceptive practices. We show that consumer surplus maximization requires lower deterrence than social welfare maximization. The analysis is robust to various extensions.
    Keywords: Asymmetric Information, Bayesian Consumers, Deception, Misleading Advertising, Signaling
    JEL: L13 L15 L4
    Date: 2015–06
  5. By: Alex Barrachina (Department of Economics, Universitat Jaume I, Castellón, Spain); Yair Tauman (IDC Herzliya, Israel and Department of Economics, Stony Brook University, NY, USA); Amparo Urbano (Department of Economic Analysis, University of Valencia,Spain)
    Abstract: We analyze the effect of industrial espionage on limit-pricing models. We consider an incumbent monopolist engaged in R&D trying to reduce his cost of production and deter a potential entrant from entering the market. The R&D project may be successful or not and its outcome is a private information of the incumbent. The entrant has an access to an Intelligence System (IS hereafter) of a certain precision that generates a noisy signal on the outcome of the R&D project, and she decides whether to enter the market based on two signals: the price charged by the incumbent and the signal sent by the IS. It is assumed that the precision of the IS is exogenous and common knowledge. Our fundamental result is that for intermediate values of the IS precision, the set of pooling equilibria is non-empty even with profitable entry and the entrant enters if the IS tells her the R&D project was not successful. Since in the classical limit- pricing models the entrant never enters in a pooling equilibrium, the use of the IS by the entrant increases competition in pooling equilibrium with high probability. Moreover, the incumbent can deter profitable entry with positive probability.
    Keywords: Espionage, Entry deterrence, Asymmetric information, Pooling equilibria
    JEL: C72 D82 L10 L12
    Date: 2015
  6. By: Jian Yang
    Abstract: We propose multi-player frameworks that mitigate decision-theoretical difficulties with the traditional normal-form game, where players are concerned with expected utility functions of their payoffs. We react to Allais's (1953) paradox by concerning players with potentially nonlinear functionals of the payoff distributions they encounter. To counter Ellsberg's (1961) paradox, we let players optimize on vectors of payoff distributions in which every component is a payoff distribution corresponding to one particular nature action. In the preference game we introduce, players merely express preferences over payoff-distribution vectors. Depending on ways in which players' mixed strategies are verified, there will emerge two equilibrium concepts, namely, the ex post and ex ante types. Conditions for equilibrium existence are identified; also, the unification of the two concepts at the traditional game is explained. When the preference relations lead to real-valued satisfaction functions, we have a satisfaction game. Two notable special cases are one coping with Gilboa and Schmeidler's (1989) ambiguity-averse worst-prior setup and another involving Artzner et al.'s (1999) coherent-risk measure with risk-averse tendencies. For both, searching for ex post equilibria boils down to solving sequences of simple nonlinear programs (NLPs).
    Date: 2015–10
  7. By: Hüning, Hendrik; Meub, Lukas
    Abstract: We develop a dynamic two-period generalized beauty contest to study the optimal level of publicity when disclosed information is subject to multipliereffects inherent to social learning. We build upon the static case, where all agents receive a private signal about an unknown fundamental state and only a fraction of all agents receive an additional public signal. However, in our model, agents no longer act simultaneously; rather, agents informed by both signals act in the first period, while those uninformed about the public signal delay their action and learn about informed agents´ actions. We show that in the unique equilibrium of our dynamic game, informed agents overreact more strongly to public signals. The optimal dissemination of public information is thus considerably lower than the static case suggests. If the social learning signal is reasonably precise, aggregate welfare is higher than in the static case. Our results hold relevance for the optimal information policy design of public authorities.
    Keywords: generalized beauty contest,monetary policy,optimal communication,social learning,strategic complementarities
    JEL: D82 D83 E5
    Date: 2015
  8. By: Matthew Polisson (Institute for Fiscal Studies and University of Leicester); John Quah (Institute for Fiscal Studies); Ludovic Renou (Institute for Fiscal Studies)
    Abstract: Consider a finite data set where each observation consists of a bundle of contingent consumption chosen by an agent from a constraint set of such bundles. We develop a general procedure for testing the consistency of this data set with a broad class of models of choice under risk and under uncertainty. Unlike previous work, we do not require that the agent has a convex preference, so we allow for risk loving and elation seeking behavior. Our procedure can also be extended to calculate the magnitude of violations from a particular model of choice, using an index first suggested by Afriat (1972, 1973). We then apply this index to evaluate different models (including expected utility and disappointment aversion) in the data collected by Choi et al. (2007). We show that among those subjects exhibiting choice behavior consistent with the maximization of some increasing utility function, more than half are consistent with models of expected utility and disappointment aversion.
    Keywords: Expected utility; rank dependent utility; maxmin expected utility; variational preferences; generalized axiom of revealed preference
    JEL: C14 C60 D11 D12 D81
    Date: 2015–09
  9. By: Mihaela van der Schaar; Simpson Zhang
    Abstract: This paper considers the evolution of a network in a discrete time, stochastic setting in which agents learn about each other through repeated interactions and maintain/break links on the basis of what they learn from these interactions. Agents have homophilous preferences and limited capacity, so they maintain links with others who are learned to be similar to themselves and cut links to others who are learned to be dissimilar to themselves. Thus learning influences the evolution of the network, but learning is imperfect so the evolution is stochastic. Homophily matters. Higher levels of homophily decrease the (average) number of links that agents form. However, the effect of homophily is anomalous: mutually beneficial links may be dropped before learning is completed, thereby resulting in sparser networks and less clustering than under complete information. There may be big differences between the networks that emerge under complete and incomplete information. Homophily matters here as well: initially, greater levels of homophily increase the difference between the complete and incomplete information networks, but sufficiently high levels of homophily eventually decrease the difference. Complete and incomplete information networks differ the most when the degree of homophily is intermediate. With multiple stages of life, the effects of incomplete information are large initially but fade somewhat over time.
    Date: 2015–10
  10. By: Franciso Galera (University of Navarra); Pedro Mendi (University of Navarra); Juan Carlos Molero (University of Navarra)
    Abstract: We propose a theoretical model to analyze the welfare implications of price discrimination in the presence of differences in quality. The model considers two markets where in each market competition takes place between a local firm that operates in that market only and a global firm that operates in both markets. All firms are assumed to be producing with zero marginal costs. Local firms produce a good that is perceived by consumers to have superior quality than that produced by the global firm. We find that there are parameter values such that welfare increases while total output decreases if the global firm engages in price discrimination. This is due to a positive allocation effect brought about precisely by the global firm engaging in price discrimination.
    Keywords: Vertical diff erentiation, third-degree price discrimination, welfare
    JEL: D43 D60
    Date: 2015–10–27

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