nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒09‒11
nineteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. A Leverage Theory of Tying in Two-Sided Markets By Choi, Jay-Pil; Jeon, Doh-Shin
  2. A Second-degree Price Discrimination by a Two-sided Monopoly Platform By Jeon, Doh-Shin; Kim, Byung-Cheol; Menicucci, Domenico
  3. Compatibility Choices under Switching Costs By Jeon, Doh-Shin; Menicucci, Domenico; Nasr, Nikrooz
  4. Political corruption in the execution of public contracts By Chiappinelli, Olga
  5. Contracting with Researchers By Matthias Verbeck; Elisabeth Schulte
  6. Treading a Fine Line : (Im)possibilities for Nash Implementation with Partially-honest Individuals By Lombardi, Michele; Yoshihara, Naoki
  7. Deferred compensation and risk-taking incentives By Roman Inderst; Marcus Opp; Florian Hoffmann
  8. Natural Implementation with Semi-responsible-sincere Agents in Pure Exchange Economies By Lombardi, Michele; Yoshihara, Naoki
  9. Information aggregation and optimal structure of the executive By Torun Dewan; Andrea Galeotti; Christian Ghiglino; Francesco Squintani
  10. Equilibrium Type of Competition with Horizontal Product Innovation By Negriu, A.
  11. 'Herding through learning in an asset pricing model' By Michele Berardi
  12. Pricing of delivery services and the emergence of marketplace platforms By Borsenberger, Claire; Cremer, Helmuth; Joram, Denis; Lozachmeur, Jean-Marie
  13. On Jensen's inequality for generalized Choquet integral with an application to risk aversion By Wioletta Szeligowska; Marek Kaluszka
  14. No One Likes to Be Second Choice By Antler, Yair
  15. An Alternative Characterization for Iterated Kalai-Smorodinsky-Nash Compromise By Saglam, Ismail
  16. Optimal Taxation with Endogenous Return to Capital By Kristjánsson, Arnaldur Sölvi
  17. The proportional Shapley value and an application By Sylvain Béal; Sylvain Ferrières; Eric Rémila; Phillippe Solal
  18. License or entry in oligopoly By Hattori, Masahiko; Tanaka, Yasuhito
  19. Political Specialization By Kevin Sheedy; Bernardo Guimaraes

  1. By: Choi, Jay-Pil; Jeon, Doh-Shin
    Abstract: Partly motivated by the recent antitrust investigations concerning Google, we develop a leverage theory of tying in two-sided markets. We analyze incentives for a monopolist to tie its monopolized product with another product in a two-sided market. Tying provides a mechanism to circumvent the non-negative price constraint in the tied product market without inviting an aggressive response as the rival firm faces the non-negative price constraint. We identify conditions under which tying in two-sided markets is profitable and explore its welfare implications. Our mechanism can be more widely applied to any markets in which sales to consumers in one market can generate additional revenues that cannot be competed away due to non-negative price constraints.
    Keywords: Leverage of monopoly power; Non-negative pricing constraint; Two-sided markets; Tying; Zero pricing
    JEL: D4 L1 L5
    Date: 2016–09
  2. By: Jeon, Doh-Shin; Kim, Byung-Cheol; Menicucci, Domenico
    Abstract: In this article we study second-degree price discrimination by a two-sided monopoly platform. We find novel distortions that arise due to the two-sidedness of the mar- ket. They make the standard result \no distortion at top and downward distortion at bottom" not holding. They generate a new type of non-responsiveness, different from the one found by Guesnerie and Laffont (1984). We also show that the platform may mitigate or remove non-responsiveness at one side by properly designing price discrimi- nation on the other side. These findings help to address our central question, i.e., when price discrimination on one side substitutes for or complements price discrimination on the other side. As an application, we study the optimal mechanism design for an advertising platform mediating advertisers and consumers.
    Keywords: (second-degree) price discrimination, two-sided markets, non-responsiveness, type reversal, advertising
    JEL: D4 D82 L5 M3
    Date: 2016–09
  3. By: Jeon, Doh-Shin; Menicucci, Domenico; Nasr, Nikrooz
    Abstract: e study firms’ compatibility choices in the presence of consumers’ switching costs. We analyze both a model of once-and-for-all compatibility choices and that of dynamic choices. Contrary to what happens in a static setting in which firms embrace compatibility to soften the current competition (Matutes and Régibeau, 1988), when consumer lock-in arises due to a significant switching cost, firms make their products incompatible in order to soften future competition, regardless of the model we consider. This reduces consumer surplus and social welfare.
    Keywords: Compatibility, Incompatibility, Switching Cost, Lock-in
    JEL: D43 L13 L41
    Date: 2016–09
  4. By: Chiappinelli, Olga
    Abstract: This paper presents a novel theory of corruption in public procurement. It considers an agency setting of contract execution where the principal is a politician who can commit to a contract auditing policy. It is found that a benevolent politician, by choosing a sufficiently strict auditing, deters the contracting firm from padding costs; conversely, a selfish politician chooses a relatively lax auditing in order to create an incentive for cost-padding, and engages in corruption with the firm in case of detection. If the cost of auditing is high enough, even a benevolent politician might prefer to allow cost-padding.
    Keywords: Corruption in procurement; Cost-padding; Selfish politician; Endogenous auditing; Procurement contracts; Principal-agent model.
    JEL: D73 D82 L51
    Date: 2016
  5. By: Matthias Verbeck (University of Marburg); Elisabeth Schulte (University of Marburg)
    Abstract: We study a setting in which one or two agents conduct research on behalf of a principal. The agents’ success depends on effort and the choice of a research technology that is uncertain with respect to its quality. A single agent has no incentive to deviate from the principal’s preferred technology choice. In the multiagent-setting researchers pursue individual rather than overall success which yields a preference for the most promising technology. We show that a mechanism that deters this bias towards mainstream research always entails an efficiency loss if researchers are risk-averse. Our results suggest that there is too little diversity in delegated research.
    Keywords: Moral hazard, Hidden action, Incentives in teams, Delegated research, Academic organization, Diversity in research
    JEL: D82 D83 D86
    Date: 2016
  6. By: Lombardi, Michele; Yoshihara, Naoki
    Abstract: This paper investigates the robustness of Dutta and Sen's (2012) Theorem 1 to re-ductions in the strategy space of individuals in relation to preference announcements. Specifically, it considers the Saijo-type's (1988) simplification of Maskin's canonical mechanism, according to which each individual's strategy choice includes her own preference and those of her k ‘neighbor’ individuals. This paper refers to this type of mechanisms as q-mechanisms where q = k + 1. A partially-honest individual is an individual who strictly prefers to tell the truth whenever lying has no effect on her material well-being. When there is at least one partially-honest participant, it offers a necessary condition for Nash implementation by q-mechanisms, called partial-honesty monotonicity, and shows that in an independent domain of preferences that condition is equivalent to Maskin monotonicity. It also shows that the limitations imposed by Maskin monotonicity can be circumvented by a q-mechanism provided that there are at least n - q + 1 partially-honest participants.
    Keywords: Nash implementation, partial-honesty, non-connected honesty standards, independent domain, q-mechanisms
    JEL: C72 D71 D82
    Date: 2016–08
  7. By: Roman Inderst (Univ. Frankfurt and Imperial College Lon); Marcus Opp (UC Berkeley, Haas School of Business); Florian Hoffmann (University of Bonn)
    Abstract: Our paper develops a simple principal-agent framework to analyze the equilibrium relationship between risk-taking and the timing of pay. In our setup, the agent's one-time action has persistent effects through affecting the arrival time distribution of a disaster event. While the principal receives informative signals about the agent's action over time, it is costly to rely on this information for incentive pay since the agent is relatively impatient. Optimal compensation contracts resolve the tension between impatience and information with at most two payout dates. Our framework lends itself to analyze recent regulatory interventions mandating minimum deferral periods and clawback provisions in the financial sector. It shows how such regulatory interference in the timing dimension causes the principal to adjust other dimensions of the compensation contract, which may then lead to higher risk-taking. Mandatory deferral requirements are more likely to be effective in reducing risk-taking when competition for agents is high.
    Date: 2016
  8. By: Lombardi, Michele; Yoshihara, Naoki
    Abstract: We study Nash implementation by natural price-quantity mechanisms in pure exchange economies when agents have intrinsic preferences for responsible-sincerity. An agent has an intrinsic preference for responsible-sincerity if she cares about truth-telling that is in line with the goal of the mechanism designer besides her material well-being. A semi-responsible-sincere agent is an agent who, given what her opponents do, acts in a non-responsible-sincere manner when a responsible-sincere behavior poses obstacles to her material well-being. The class of e¢ cient allocation rules that are Nash implementable is identi.ed provided that there is at least one agent who is semi-responsible-sincere. The Walrasian rule is shown to belong to that class.
    Keywords: Nash equilibrium, exchange economies, intrinsic preferences for responsible-sincerity, boundary problem, price-quantity mechanism
    JEL: C72 D71
    Date: 2016–08
  9. By: Torun Dewan; Andrea Galeotti; Christian Ghiglino; Francesco Squintani
    Abstract: We model two aspects of executives in parliamentary democracies: Decision-making authority is assigned to individuals, and private information is aggregated through communication. When information is relevant to all policies and communication is private, all decisions should be centralized to a single politician. A government that holds cabinet meetings, where information is made available to all decision makers, outperforms one where communication is private: A multimember cabinet can be optimal; it need not be single peaked around the most moderate politician or ideologically connected. Centralization is nonmonotonic in the degree of ideological divergence. In a large cabinet, all power should be given to the most moderate politician. Even when uncertainty is policy specific and a single politician is informed on each policy, power should never be fully decentralized. Our model provides a justification for centralized authority and cabinet meetings that enhance the quality of policy.
    JEL: L91 L96
    Date: 2015–04
  10. By: Negriu, A. (University of Amsterdam)
    Abstract: Singh and Vives (1984) consider a game where duopolists first commit to a strategic variable, quantity or price, and then compete in selling horizontally differentiated products. Here product substitutability is endogenized by allowing firms to undertake R&D investments to increase differentiation. This has important consequences for the determination of the equilibrium type of competition. Whereas in the original model Cournot competition always ensued in equilibrium, horizontal product innovation allows all types of market competition to be an equilibrium, depending on model parameters. As market size increases, the game of choosing the strategic variable changes structure. For small market size it is a dominance solvable game with Cournot competition as unique outcome. For higher market size, the firms face a Prisoner's Dilemma where Bertrand competition would be Pareto optimal, but Cournot competition is the non-cooperative Nash Equilibrium. As market size further increases, the game of choosing market variables becomes a Hawk-Dove game where, in pure strategy equilibrium, one firm sets quantity and the other sets price. When market size increases even further, setting prices will be the strictly dominant strategy and Bertrand competition is the unique equilibrium outcome for a relatively small parameter-range. Finally, for suffciently high market size all equilibria corresponding to differentiated duopoly abruptly dissappear and the market separates into two monopolies.
    Date: 2015
  11. By: Michele Berardi
    Abstract: In this paper we show how uncertainty and learning can lead to a disconnection between fundamental values and prices in a simple asset pricing model. Agents use prices, besides an idiosyncratic exogenous signal, to infer fundamental values: as agents accumulate information, they put increasing weight on the public signal and in the limit they ignore completely their private information. The Bayesian equilibrium implies that agents end up relying only on prices in their signal extraction problem, an outcome that reminds the rational herding result in sequential decision making. We also consider two extensions that should mitigate this e¤ect, namely constant gain adaptive learning and Bayesian learning with an explicit probability of change in the fundamental. In both cases the problem persists, though somewhat mitigated. As a by-product, we also establish a connection between the constant gain parameter in adaptive learning and the subjective probability of exogenous changes in Bayesian learning..
    Date: 2016
  12. By: Borsenberger, Claire; Cremer, Helmuth; Joram, Denis; Lozachmeur, Jean-Marie
    Abstract: This paper studies the pricing of delivery services and its impact on the market structure in the-commerce sector. We focus on one of the ongoing trends, namely the development of marketplaces. A retailer may not just sell its own products; but also provide a marketplace for other sellers, offering a variety of services including delivery. Marketplaces create a "secondary" market which undermines the delivery operator's abilityto differentiate prices. We study the subgame perfect equilibrium of a sequential game with two operators where retailer 0 may potentially develop a marketplace. The delivery operator and retailer 0 bargain over the delivery rate. Then, retailer 0 chooses the per-unit rate and the fixed fee at which it is willing to sell its delivery service to the other retailer. Finally, retailer 1 chooses its delivery option: either it directly patronizes the independent delivery operator, or it uses the services o¤ered by the marketplace, and the corresponding subgame is played. Analytical results are completed by numerical simulations and lead to three main lessons. First the equilibrium nearly always implies a discount to the "leading" retailer, even when the profit maximizing operator has all the bargaining power. Second, the delivery operator cannot avoid the emergence of a marketplace even though this decreases its profits. Third, the market power of the delivery operator cannot be assessed solely by considering its market share.
    Keywords: E-commerce, parcel delivery, marketplace, pricing and market structure,price discrimination
    JEL: L1 L5 L81
    Date: 2016–08
  13. By: Wioletta Szeligowska; Marek Kaluszka
    Abstract: In the paper we give necessary and sufficient conditions for the Jensen inequality to hold for the generalized Choquet integral with respect to a pair of capacities. Next, we apply obtained result to the theory of risk aversion by providing the assumptions on utility function and capacities under which an agent is risk averse. Moreover, we show that the Arrow-Pratt theorem can be generalized to cover the case, where the expectation is replaced by the generalized Choquet integral.
    Date: 2016–09
  14. By: Antler, Yair
    Abstract: A decision maker is interested in appointing one individual from a group of candidates to a public position with an exogenous wage. He must decide in what order to approach them. Candidates who are more valuable to the decision maker are less likely to be available. The candidates' preferences have a social component: each candidate finds the position more attractive if he is highly ranked by the decision maker (relative to the other candidates). However, the decision maker's preferences are his private information. As a result, candidates infer the decision maker's evaluation of them based on the number of candidates who have previously turned him down. The main result is that when the number of candidates is suficiently large, all of the candidates reject the decision maker's offers, including those whom he most values. Moreover, the decision maker's payoff is not monotonic in the number of candidates.
    Date: 2016
  15. By: Saglam, Ismail
    Abstract: In this paper, we offer for two-person games an alternative characterization of Iterated Kalai-Smorodinsky-Nash Compromise (IKSNC), which was introduced and first characterized by Saglam (2016) for $n$-person games. We present an axiom called Gamma-Decomposability, satisfied by any solution that is decomposable with respect to a given reference solution Gamma. We then show that the IKSNC solution is uniquely characterized by Gamma-Decomposability whenever Gamma satisfies the standard axioms of Independence of Equivalent Utility Representations and Symmetry, along with three additional axioms, namely Restricted Monotonicity of Individually Best Extensions, Weak Independence of Irrelevant Alternatives, and Weak Pareto Optimality under Symmetry.
    Keywords: Cooperative bargaining; Kalai-Smorodinsky solution; Nash solution
    JEL: C71 C78
    Date: 2016–09–07
  16. By: Kristjánsson, Arnaldur Sölvi (Dept. of Economics, University of Oslo)
    Abstract: This paper characterizes the optimal income and wealth tax schedules when rates of return are endogenous. Individuals exert investment effort in order to increase the return on their investments. Agents are heterogeneous along two dimensions: their investment ability and their labour market productivity. I show that when individuals can exert investment effort, the Atkinson-Stiglitz theorem that capital income should not be taxed does not hold. When the government observes wealth and capital income, it is optimal to tax capital income and subsidize wealth. When wealth is not observed, it is optimal to tax capital Income. The marginal tax rates on labour and capital income should not be equal, but they should be positively related to each other. The results extend to a model where individuals can hire investment advisors to increase the rate of return and also to a model with heterogeneous inheritance, in which case both capital Income and wealth should be taxed.
    Keywords: Optimal taxation; capital taxation; endogenous return to capital
    JEL: G11 H21 H24
    Date: 2016–04–28
  17. By: Sylvain Béal (Université de Bourgogne Franche-Comté, CRESE); Sylvain Ferrières (Université de Bourgogne Franche-Comté, CRESE); Eric Rémila (Université de Saint-Etienne, Gate); Phillippe Solal (Université de Saint-Etienne, Gate)
    Abstract: We introduce a non linear weighted Shapley value for cooperative games with transferable utility,in which the weights are endogenously given by the players’ stand-alone worths. We call it theproportional Shapley value since it distributes the Harsanyi dividend (Harsanyi, 1959) of all coalitions in proportion to the stand-alone worths of its members. We show that this value recommends an appealing payoff distribution in a land production economy introduced in Shapley and Shubik (1967). Although the proportional Shapley value does not satisfy the classical axioms of linearity and consistency (Hart and Mas-Colell, 1989), the main results provide comparable axiomatic characterizations of our value and the Shapley value by means of weak versions of these two axioms. Moreover, our value inherits several well-known properties of the weighted Shapley values.
    Keywords: (Weighted) Shapley value, proportionality, Harsanyi dividends, potential, land production economy
    Date: 2016–08
  18. By: Hattori, Masahiko; Tanaka, Yasuhito
    Abstract: We consider an incentive of a choice of options for an outside innovating firm to license its new cost reducing technology to incumbent firms, or to enter into the market with or without license in an oligopoly with three firms. We will show that under linear demand and cost functions the results depend on the size of the market. When the market size is large, license to two incumbent firms without entry strategy is the optimum strategy for the innovating firm. However, when the market size is not large, license to one incumbent firm with or without entry strategy may be optimum.
    Keywords: license, entry, oligopoly, innovating firm
    JEL: D43 L13
    Date: 2016–09–06
  19. By: Kevin Sheedy (London School of Economics); Bernardo Guimaraes (Sao Paulo School of Economics - FGV)
    Abstract: This paper presents a theory of political specialization in which some countries uphold the rule of law while others consciously choose not to do so, even though they are ex ante identical. This is borne out of two key insights: for incumbents in each country, (i) the first steps to the rule of law have the greatest private cost, and (ii) steps taken by some countries in the direction of the rule of law make it less attractive for others to follow the same path. The world equilibrium features a symbiotic relationship between despotic and rule-of-law economies: by producing technology-intensive goods that require protection of property rights, rule-of-law economies raise the relative price of natural resources and increase incentives for despotism in other countries; while the choice of despotism entails a positive externality because cheap oil makes the rule of law more attractive elsewhere in the world.
    Date: 2016

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