nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒08‒14
nine papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Price Competition with Decreasing Returns-to-Scale: A General Model of Bertrand-Edgeworth Duopoly By Blake Allison; Jason Lepore
  2. Fire-Sale Externalities By Eduardo Dávila; Anton Korinek
  3. Paralyzed by Fear: Rigid and Discrete Pricing under Demand Uncertainty By Cosmin L. Ilut; Rosen Valchev; Nicolas Vincent
  4. Psychic Punishment Costs and Deterrence By Bakó, Barna; Isztin, Péter
  5. A Short Note on Discrimination and Favoritism in the Labor Market By Nicolas Salamanca; Jan Feld
  6. Learning to Coordinate: Co-Evolution and Correlated Equilibrium By Alejandro Lee-Penagos
  7. Efficiency of Flexible Budgetary Institutions By T. Renee Bowen; Ying Chen; Hülya K. Eraslan; Jan Zápal
  8. Retailer’s product line choice with manufacturer’s multichannel marketing By Cong Pan
  9. Who would invest only in the risk-free asset? By Nuno Azevedo; Diogo Pinheiro; Stylianos Xanthopoulos; Athanasios Yannacopoulos

  1. By: Blake Allison (Department of Economics, Emory University); Jason Lepore (Department of Economics, California Polytechnic State University)
    Abstract: We present a novel approach to analyzing models of price competition. By realizing price competition as a class of all-pay contests, we are able to generalize the models in which pricing behavior can be characterized, accommodating convex (possibly asymmetric) cost structures and general demand rationing schemes. Using this approach, we identify necessary and sufficient conditions for a pure strategy equilibrium and use them to demonstrate the fragility of deterministic outcomes in pricing games. Consequently, we characterize bounds on equilibrium pricing and profits of all mixed strategy equilibria and examine the effect of demand and supply shifts on those bounds. Our focus on bounds can be motivated by the potential for multiple non-payoff equivalent equilibria, as we identify two types of equilibrium strategies through a derivation of sufficient conditions for uniqueness of equilibrium.
    Keywords: Price competition, Contest, Demand rationing, Convex costs, Capacity constraints
    Date: 2016
  2. By: Eduardo Dávila; Anton Korinek
    Abstract: This paper characterizes the efficiency properties of competitive economies with financial constraints and fire sales. We show that two distinct pecuniary externalities occur in such settings: distributive externalities that arise from incomplete insurance markets and can take any sign; and collateral externalities that arise from price-dependent financial constraints and are conducive to over-borrowing. For both types of externalities, we identify three sufficient statistics that determine optimal taxes on financing and investment decisions to implement constrained efficient allocations. We illustrate how to employ our framework in a number of applications. We highlight how small changes in parameters may cause the sufficient statistics that drive distributive externalities to flip sign, leading to either under- or over-borrowing. We also show that financial amplification is neither necessary nor sufficient to generate inefficient fire-sale externalities.
    JEL: D62 E44 G21 G28
    Date: 2016–07
  3. By: Cosmin L. Ilut; Rosen Valchev; Nicolas Vincent
    Abstract: Price rigidity is central to many predictions of modern macroeconomic models, yet, standard models are at odds with certain robust empirical facts from micro price datasets. We propose a new, parsimonious theory of price rigidity, built around the idea of demand uncertainty, that is consistent with a number of salient micro facts. In the model, the monopolistic firm faces Knightian uncertainty about its competitive environment, which has two key implications. First, the firm is uncertain about the shape of its demand function, and learns about it from past observations of quantities sold. This leads to kinks in the expected profit function at previously observed prices, which act as endogenous costs of changing prices and generate price stickiness and a discrete price distribution. Second, the firm is uncertain about how aggregate prices relate to the prices of its direct competitors, and the resulting robust pricing decision makes our rigidity nominal in nature.
    JEL: C1 D8 E3 L11
    Date: 2016–08
  4. By: Bakó, Barna; Isztin, Péter
    Abstract: In this paper we analyze criminal deterrence in the presence of specific psychic costs of punishments. We consider a dynamic model with three players, analyzing the choices of a representative lawmaker, potential criminal and judge. In our setting the lawmaker decides whether to introduce a fixed punishment enhancement above a chosen threshold of crime level, depending on its popularity among the voters. In reaction, the judge, who is influenced by her own preferences as well as the opinion of her peer group, might change the probability of punishment, through affecting the standard of reasonable doubt. Our results suggest that large discontinuous and mandatory increases in punishment can have unintended effects that are contrary to the stated goal of such punishment enhancements. In equilibrium, when either the judge or her peer group is "anti-punishment" enough, the level of criminal activity might increase in response to the punishment enhancement. This perverse effect is less likely to occur if there is a higher number of peer groups within the "elite", so that a greater extent of self-selection by judges can occur. Our results have relevance for a number of areas outside the traditional criminal justice system as well, such as special courts (such as ecclesiastical or military courts), or the strictness and enforcement of regulations.
    Keywords: crime, deterrence, punishment, peer effects
    JEL: D81 K12 K42
    Date: 2016–08–01
  5. By: Nicolas Salamanca (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; ARC Centre of Excellence for Children and Families over the Life Course, and; Institute for the Study of Labor (IZA)); Jan Feld (Victoria University of Wellington)
    Abstract: We extend Becker’s model of discrimination by allowing firms to have discriminatory and favoring preferences simultaneously. We draw the two-preference parallel for the marginal firm, illustrate the implications for wage differentials, and consider the implied long-run equilibrium. In the short-run, wage differentials depend on relative preferences. However, in the long-run, market forces drive out discriminatory but not favoring firms.
    Keywords: Wage gap, nepotism, firm preferences, long-run equilibrium
    JEL: J70 J31
    Date: 2016–08
  6. By: Alejandro Lee-Penagos (School of Economics, University of Nottingham)
    Abstract: In a coordination game such as the Battle of the Sexes, agents can condition their plays on external signals that can, in theory, lead to a Correlated Equilibrium that can improve the overall payoffs of the agents. Here we explore whether boundedly rational, adaptive agents can learn to coordinate in such an environment. We find that such agents are able to coordinate, often in complex ways, even without an external signal. Furthermore, when a signal is present, Correlated Equilibrium are rare. Thus, even in a world of simple learning agents, coordination behavior can take on some surprising forms.
    Keywords: Battle of the Sexes, Correlated Equilibrium, Evolutionary Game Theory, Learning Algorithms, Coordination Games, Adaptive Agents
    Date: 2016–11
  7. By: T. Renee Bowen; Ying Chen; Hülya K. Eraslan; Jan Zápal
    Abstract: Which budgetary institutions result in efficient provision of public goods? We analyze a model with two parties bargaining over the allocation to a public good each period. Parties place different values on the public good, and these values may change over time. We focus on budgetary institutions that determine the rules governing feasible allocations to mandatory and discretionary spending programs. Mandatory spending is enacted by law and remains in effect until changed, and thus induces an endogenous status quo, whereas discretionary spending is a periodic appropriation that is not allocated if no new agreement is reached. We show that discretionary only and mandatory only institutions typically lead to dynamic inefficiency and that mandatory only institutions can even lead to static inefficiency. By introducing appropriate flexibility in mandatory programs, we obtain static and dynamic efficiency. An endogenous choice of mandatory and discretionary programs, sunset provisions and state-contingent mandatory programs can provide this flexibility in increasingly complex environments.
    JEL: C73 C78 D61 D78 H61
    Date: 2016–07
  8. By: Cong Pan
    Abstract: This paper studies how a retailer decides the length of product line in a vertically related industry. We study a market with two product varieties. Each retailer decides the number of varieties it procures from an upstream manufacturer. The manufacturer may open an online store and encroach on the resale market. In the case of a monopoly retailer, anticipating the online store’s encroachment, the retailer may be willing to shorten its product line, although it can choose a full-length one. In the case of duopoly retailers, on the other hand, retailers may make their product lines completely overlapped, partially overlapped, or non-overlapped. Moreover, the total surplus may decrease due to the efficiency loss in the online channel, although the competition in the resale market becomes more intense.
    Date: 2016–07
  9. By: Nuno Azevedo; Diogo Pinheiro; Stylianos Xanthopoulos; Athanasios Yannacopoulos
    Abstract: Within the setup of continuous-time semimartingale financial markets, we show that a multiprior Gilboa-Schmeidler minimax expected utility maximizer forms a portfolio consisting only of the riskless asset if and only if among the investor's priors there exists a probability measure under which all admissible wealth processes are supermartingales. Furthermore, we show that under a certain attainability condition (which is always valid in finite or complete markets) this is also equivalent to the existence of an equivalent (local) martingale measure among the investor's priors. As an example, we generalize a no betting result due to Dow and Werlang.
    Date: 2016–08

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.