nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒04‒04
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. The Value of Mediated Communication By Andrés Salamanca Lugo
  2. The Value of Public Information in a Two-Region Model By Olga Kuznetsova
  3. On Competing Mechanisms under Exclusive Competition By Andrea Attar; Eloisa Campioni; Gwenaël Piaser
  4. Sequential screening and the relationship between principal's preferences and agent's incentives By Daniel Danau; Annalisa Vinella
  6. Continuity and Incentive Compatibility in Cardinal Voting Mechanisms By Lars EHLERS; Dipjyoti MAJUMDAR; Debasis MISHRA; Arunava SEN
  7. The Optimal Trading Partner for an Upstream Monopolist By Yamada, Mai
  8. Strategic vote trading in power-sharing systems By Dimitrios Xefteris; Nicholas Ziros
  9. Is Diversity in Capabilities Desirable When Adding Decision Makers? By BEN-YASHAR, Ruth; NITZAN, Shmuel
  10. Competitive Search with Ex-post Opportunism By Pere Gomis-Porqueras; Benoit Julien; Liang Wang
  12. Hypothetical Bargaining and the Equilibrium Selection Problem in Non-Cooperative Games By Radzvilas, Mantas
  13. Dual Random Utility Maximisation By Paola Manzini; Marco Mariotti
  14. Monopoly VS Competition: Market Structure’s Impact on Product Innovation-with Endogenous Quality of New Product By Yang, Jinrui
  15. Rationing and screening in crowdinvesting-markets By Mäschle, Oliver; Dalvai, Wilfried
  16. Descending Price Coordinates Approximately Efficient Search By Robert Kleinberg; Bo Waggoner; E. Glen Weyl
  17. Social Structure, Markets and Inequality By Julien Gagnon; Sanjeev Goyal; ;
  18. Strategy Revision Opportunities and Collusion By Matthew Embrey; Friederike Mengel; Ronald Peeters
  19. Liquidity Requirements, Liquidity Choice and Financial Stability By Douglas W. Diamond; Anil K Kashyap
  20. Vertical Differentiation and Collusion: Cannibalization or Proliferation? By Jean J. Gabszewicz; Marco A. Marini; Ornella Tarola

  1. By: Andrés Salamanca Lugo (TSE (GREMAQ, Université Toulouse I) - GREMAQ - Groupe de recherche en économie mathématique et quantitative - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - Institut national de la recherche agronomique (INRA) - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Kamenica and Gentzkow (2011) consider a model in which a sender chooses a public communication device for signaling his information to an uninformed receiver, who then takes an action that affects the welfare of both individuals. In their model, the sender is fully committed to truthfully communicate the signal to the receiver, so that they abstract from incentive compatibility issues. By considering mediated communication, we provide an analytical framework overcoming this overly restrictive assumption. We use the concept of virtual utility to develop a geometric approach to the sender's optimization problem. We characterize the value of persuasion from the concavification of a non-revealing function over beliefs. We apply our approach to a model of information transmission based on Crawford and Sobel (1982). In this setting, we provide necessary and sufficient conditions for the sender to benefit from his private information.
    Keywords: Bayesian persuasion,mediated communication,incentive compatibility,virtual utility
    Date: 2016–01–11
  2. By: Olga Kuznetsova (National Research University Higher School of Economics)
    Abstract: Economic literature is far from having a consensus about the social value of public information. Nevertheless, most studies agree that strategic complementarity increases the weight of public signals in private actions. In our paper we show that this result is not general. In a two-region model we relax the autarky assumption, common to previous studies, and suppose that strategic complementarity is present both inside and between the regions. When strategic complementarity is strengthened, the agents redistribute increased weight of public information between the signals from different regions. If the weight of the domestic public signal is sufficiently high, an increase in strategic complementarity may lower it. In this paper we study the welfare properties of this information structure and show that transparency in our model may be detrimental only if strategic complementarity is weak. Furthermore, we compare equilibrium information policies with the social optimum and show that policymakers in small regions tend to be too transparent, while policymakers in large regions tend to be too opaque.
    Keywords: strategic complementarity, information policy, public information
    JEL: D82 E61
    Date: 2016
  3. By: Andrea Attar; Eloisa Campioni; Gwenaël Piaser
    Abstract: We study games in which several principals design incentive schemes in the presence of privately informed agents. Competition is exclusive: each agent can participate with at most one principal, and principal-agents corporations are isolated. We analyze the role of standard incentive compatible mechanisms in these contexts. First, we provide a clarifying example showing how incentive compatible mechanisms fail to completely characterize equilibrium outcomes even if we restrict to pure strategy equilibria. Second, we show that truth-telling equilibria are robust against unilateral deviations toward arbitrary mechanisms. We then consider the single agent case and exhibit sufficient conditions for the validity of the revelation principle.
    Keywords: Competing Mechanisms, Exclusive Competition, Incomplete Information.
    JEL: D82
    Date: 2016–03–17
  4. By: Daniel Danau (Université de Caen Basse-Normandie); Annalisa Vinella (Università degli Studi di Bari "Aldo Moro")
    Abstract: In sequential screening problems it is found that, under some regularity conditions, local incentive compatibility constraints are sufficient for implementability. However, this follows from the assumption that the possible distributions of the unknown variable satisfy either first-order stochastic dominance or mean-preserving spread. That assumption is matched with private information about either the expected value or the spread of the variable. In this paper we allow for private information about both parameters. In a setting with four possible cost distributions, two with equal expected values and different spreads and two with different expected values and equal spreads, we show that there can be multiple combinations of binding incentive constraints depending on the principal's preferences. The less concave / more convex that the marginal surplus is, the more that the binding incentive constraints are related to private information about one parameter of the distribution relative to the other. Yet, screening is always two-dimensional. Local incentive constraints are sufficient, as in the literature, only when the marginal surplus is sufficiently convex. We further suggest that, in the same vein as in Consumption theory, the contractual choice can be regarded as mirroring the preference of the decision-maker for a lottery that occasions a higher (certain) cost but grants the possibility of facing more efficient (random) outcomes. Resting on this interpretation, we assess that the benefit of screening the agent in two stages, rather than in the contracting stage only, is higher when the marginal surplus is less concave / more convex.
    Keywords: Sequential screening, multidimensional screening, expected cost, spread, marginal surplus, cost overruns
    JEL: D63 E24 O15 O40
    Date: 2016–03
  5. By: Ismail Saglam (Department of Economics, Ipek University)
    Abstract: Baron and Myerson (BM) (1982) propose an ex-ante optimal incentive-compatible mechanism to regulate a monopolistic firm with an unknown cost parameter. We modify the regulatory mechanism of BM by allowing the monopolistic firm to choose for the regulator's prior beliefs a finer support inside the priorly known support. Under the modified mechanism the optimal support for the monopolistic firm becomes a truncation of the prior support from only below and up to its cost report. We show that there exist regulatory environments where the modified mechanism strongly Pareto dominates the BM mechanism in the ex-post sense under all social welfare functions treating consumers and the monopolistic firm unequally. Moreover, in no regulatory environment the modified mechanism is weakly Pareto dominated by the BM mechanism.
    Keywords: Monopoly; Regulation; Asymmetric Information
    JEL: D82 L51
    Date: 2016–03
  6. By: Lars EHLERS; Dipjyoti MAJUMDAR; Debasis MISHRA; Arunava SEN
    Abstract: We show that every cardinal incentive compatible voting mechanism satisfying a continuity condition, must be ordinal. Our results apply to many standard models in mechanism design without transfers, including the standard voting models with any domain restrictions.
    Keywords: incentive compatibility, cardinal utilities, ordinal
    JEL: D78 D82
    Date: 2016
  7. By: Yamada, Mai
    Abstract: We examine an optimal trading partner for an upstream monopolist, an input supplier, in a situation in which the intensity of market competition depends on trading partner choice. The upstream monopolist supplies the input to either the incumbent or the entrant. We assume only incumbent has the outside option which it can make the input by itself and then produces the final product. On the other hand, the entrant does not have the outside option. If the upstream firm chooses the incumbent as its trading partner, it can have a bilateral monopoly relationship with the incumbent. If the upstream firm chooses the entrant as its trading partner, it faces downstream competition. We show trading with the entrant can yield greater profits for the upstream monopolist than trading with the incumbent. Thus, the upstream monopolist has incentives to encourage downstream competition through its trading partner choice. Our paper suggests that the existence of the incumbent's outside option encourages new entry into the downstream market.
    Keywords: Upstream monopolist; Trading partner choice; Bargaining game; Profits; Outside Option
    JEL: C78 L13
    Date: 2016–03–01
  8. By: Dimitrios Xefteris; Nicholas Ziros
    Abstract: This paper studies decentralized vote trading in a power-sharing system that follows the rules of strategic market games. In particular, we study a two-party election, in which prior to the voting stage voters are free to trade votes for money. Voters hold private information about both their ordinal and cardinal preferences, whereas their utilities are proportionally increasing in the vote share of their favorite party. In this framework we prove generic existence of a unique full trade equilibrium (an equilibrium in which nobody refrains from vote trading). We moreover argue that vote trading in such systems unambiguously improves voters' welfare.
    Keywords: vote trading, strategic market games, power sharing
    JEL: C72 D72 P16
    Date: 2016–03
  9. By: BEN-YASHAR, Ruth; NITZAN, Shmuel
    Abstract: When the benefit of making a correct decision is sufficiently high, even a slight increase in the probability of making such a decision justifies an increase in the number of decision makers. Applying a standard uncertain dichotomous choice benchmark setting, this study focuses on the relative desirability of two alternatives: adding individuals with capabilities identical to the existing ones and adding identical individuals with mean-preserving capabilities that depend on the states of nature. Our main result establishes that when the group applies the simple majority rule, variability in the capabilities of the new decision makers under the two states of nature, which is commonly observed in various decision-making settings, is less desirable in terms of the probability of making the correct decision.
    Keywords: decisional capabilities, group extension, asymmetry, homogeneity, diversity, mean preservation
    JEL: D81
    Date: 2016–03–16
  10. By: Pere Gomis-Porqueras (Deakin University); Benoit Julien (University of New South Wales); Liang Wang (University of Hawaii Manoa)
    Abstract: We consider a frictional market where buyers are uncoordinated and sellers can not commit to a per-unit price and quantity of a divisible good ex-ante. By doing so sellers can exploit their local monopoly power by adjusting prices or quantities depending on the case once the local demand is realized. We find that when sellers can adjust quantities ex-post, then there exists a unique symmetric equilibrium where the increase in the buyer-seller ratio leads to higher quantities and prices in equilibrium. When sellers post ex-ante quantities and adjust prices ex-post, a symmetric equilibrium does not exist.
    Keywords: Competitive Search; Price Posting; Quantity Posting
    JEL: D40 L10
    Date: 2016–03
  11. By: Marilda Sotomayor
    Abstract: We approach the roommate problem by focusing on well-behaved matchings, which are those individually rational matchings whose blocking pairs, if any, are formed with unmatched agents. We show that the set of stable matchings is non-empty if and only if no well-behaved and unstable matching is Pareto optimal among all well-behaved matchings. The economic intuition underlying this condition is that blocking can be done so that the transactions at any well-behaved and unstable matching need not be undone as agents reach the the set of stable matchings. We also give a sufficient condition on the preferences of the agents for the non-emptiness of the set of stable matchings. New properties of economic interest are proved
    Keywords: Core; Stable matching; well-behaved matching; simple matching.
    JEL: C78 D78
    Date: 2016–03–14
  12. By: Radzvilas, Mantas
    Abstract: Orthodox game theory is often criticized for its inability to single out intuitively compelling Nash equilibria in non-cooperative games. The theory of virtual bargaining, developed by Misyak and Chater (2014) suggests that players resolve non-cooperative games by making their strategy choices on the basis of what they would agree to play if they could openly bargain. The proposed formal model of bargaining, however, has limited applicability in non-cooperative games due to its reliance on the existence of a unique non-agreement point – a condition that is not satisfied by games with multiple Nash equilibria. In this paper, I propose a model of ordinal hypothetical bargaining, called the Benefit-Equilibration Reasoning, which does not rely on the existence of a unique reference point, and offers a solution to the equilibrium selection problem in a broad class of non-cooperative games. I provide a formal characterization of the solution, and discuss the theoretical predictions of the suggested model in several experimentally relevant games.
    Keywords: Nash equilibrium, bargaining, equilibrium selection problem, Nash bargaining solution, correlated equilibrium, virtual bargaining, best-response reasoning
    JEL: C70 C71 C72 C78
    Date: 2016–03–24
  13. By: Paola Manzini (School of Economics and Finance, University of St Andrews); Marco Mariotti (School of Economics and Finance, Queen Mary University of London)
    Abstract: Dual Random Utility Maximisation (dRUM) is Random Utility Maximisation when utility depends on only two states. This class has many relevant behavioural interpretations and practical applications. We show that dRUM is (generically) the only stochastic choice rule that satisfies Regularity and two new properties: Con- stant Expansion (if the choice probability of an alternative is the same across two menus, then it is the same in the merged menu), and Negative Expansion (if the choice probability of an alternative is less than one and differs across two menus, then it vanishes in the merged menu). We extend the theory to menu-dependent state probabilities. This accommodates prominent violations of Regularity such as the attraction, similarity and compromise effects.
    Keywords: Stochastic Choice, Attraction Effect, Similarity Effect
    JEL: D90
    Date: 2016–03–23
  14. By: Yang, Jinrui
    Abstract: This paper focuses on innovation for new product with exogenously determined horizontal difference from initial product which is provided either by a monopolist or by competitive firms. The innovator, no matter initially under monopoly or competition, will be unique producer of new product and need decide quality of new product which is correlated with investment for innovation. The paper through a model shows that for horizontally similar new product, competition is superior to monopoly to innovate. However, for typical horizontally differentiated product, a monopolist would choose higher quality and invest more than a competitive innovator does if innovation is complex, but brings about lower endogenous quality than the innovator initially under competition does if innovation is easy. Monopoly can support sales of new product with higher price of initial product, but also hamper product innovation to avoid erosion of initial profit. If it is presumed that complexity of innovation is always huge at the beginning, monopoly is more likely to generate innovation for horizontally different product while competition for similar product, respectively compared to each other.
    Keywords: product innovation; horizontal difference; monopoly; competition; complexity of innovation
    JEL: D8 L1 O3 O31
    Date: 2016–03–17
  15. By: Mäschle, Oliver; Dalvai, Wilfried
    Abstract: The allocation of shares on crowd-investing-platforms is best described by the phrase "first come, first served". An entrepreneur who sells corporate equity to a "crowd" of investors on such a platform chooses a fixed investment target before the investment period begins. Once the aggregate investments equal the investment target the financing period ends immediately. We demonstrate that this preferential treatment of early investors is not optimal because it potentially excludes informational disadvantaged investors and entrepreneurs from the market. We recommend a market design that allows for some excessive demand. Such a design would increase the willingness of informational disadvantaged investors and entrepreneurs to participate in the market. At the same time, it would minimize a platforms screening costs and maximize its profits.
    Keywords: crowd-investing,initial public offering,excessive demand,market microstructure,asymmetric information
    JEL: D40 D45 G21 G32 L10
    Date: 2016
  16. By: Robert Kleinberg; Bo Waggoner; E. Glen Weyl
    Abstract: When exploring acquisition targets, firms typically begin with the possibilities offering greatest option value and work their way down, as prescribed by optimal search theory. Yet the market designs economists have often prescribed, involving simultaneous or ascending prices, stymie this process. As a result they may be arbitrarily inefficient when one accounts for the costs bidders must invest to learn their value for acquiring different items. We present a model that incorporates such costs, and a simple descending price procedure that we prove robustly approximates the fully optimal sequential search process quite generally. Our results exploit a novel characterization of Weitzman's "Pandora's Box" problem in terms of option pricing theory that connects seamlessly with recent techniques from algorithmic mechanism design.
    Date: 2016–03
  17. By: Julien Gagnon; Sanjeev Goyal; ;
    Abstract: The interaction between social structure and markets remains a central theme in the social sciences. In some instances, markets can build on and enhance social networks' economic role; in other contexts, markets appear to be in direct competition with social networks. The impact of markets on inequality and welfare is also varying: while markets can sometimes offer valuable outside options to marginalised individuals, in other situations only well connected and better off individuals can benefit from them. In this paper, our goal is to understand the economic mechanisms that can explain these different empirical patterns. We develop a simple model that combines social networks and a mix of network-exchange and market-exchange activities. The key to understanding the empirical patterns and phenomena lies in the relation between the two activities i.e., whether they are (strategic) complements or substitutes. Social connectedness facilitates the adoption of the market action if the two activities are complements; the converse is true in case of substitutes. Inequality in a social structure is typically reinforced by the market in case the two actions are complements; the converse holds true if they are substitutes.
    Keywords: Networks, substitutes and complements, Welfare.
    JEL: D62 D63 L14 O17
    Date: 2015–02–24
  18. By: Matthew Embrey (University of Sussex); Friederike Mengel (University of Essex and Maastricht University); Ronald Peeters (Maastricht University)
    Abstract: This paper studies whether and how strategy revision opportunities affect levels of collusion in indefinitely repeated two-player games. Consistent with standard theory, we find that such opportunities do not affect strategy choices, or collusion levels, if the game is of strategic substitutes. In contrast, there is a strong and positive effect for games of strategic complements. Revision opportunities lead to more collusion. The latter cannot be explained by renegotiation or standard risk-dominance considerations, but is consistent with a notion of fear of miscoordination based on minmax regret.
    Keywords: strategy revision opportunities, cooperation, repeated games, complements vs. substitutes, fear of miscoordination
    JEL: C73 C92 D43
    Date: 2016–02
  19. By: Douglas W. Diamond; Anil K Kashyap
    Abstract: We study a modification of the Diamond and Dybvig (1983) model in which the bank may hold a liquid asset, some depositors see sunspots that could lead them to run, and all depositors have incomplete information about the bank’s ability to survive a run. The incomplete information means that the bank is not automatically incentivized to always hold enough liquid assets to survive runs. Regulation similar to the liquidity coverage ratio and the net stable funding ratio (that are soon be implemented) can change the bank’s incentives so that runs are less likely. Optimal regulation would not mimic these rules.
    JEL: E44 G01 G18 G21
    Date: 2016–03
  20. By: Jean J. Gabszewicz (CORE, Université Catholique de Louvain); Marco A. Marini (Università La Sapienza, Roma); Ornella Tarola (Università La Sapienza, Roma)
    Abstract: In this paper, we tackle the dilemma of pruning versus proliferation in a vertically differentiated oligopoly under the assumption that some firms collude and control both the range of variants for sale and their corresponding prices, likewise a multiproduct firm. We analyse whether pruning emerges and, if so, a fighting brand is marketed. We find that it is always more profitable for colluding firms to adopt a pricing strategy such that some variants are withdrawn from the market. Under pruning, these firms commercialize a fighting brand only when facing competitors in a low-end market. The same findings do not hold when firms are horizontally differentiated along a circle.
    Keywords: Vertically Differentiated Markets, Cannibalization, Market Pruning, Price Collusion
    JEL: D42 D43 L1 L12 L13 L41
    Date: 2016–03

This nep-mic issue is ©2016 by Jing-Yuan Chiou. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.