nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒05‒07
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Dynamically consistent preferences under imprecise probabilistic information By Riedel, Frank; Tallon, Jean-Marc; Vergopoulos, Vassili
  2. Cheap Talk Advertising in Auctions: Horizontally vs Vertically Differentiated Products By Ian Jewitt; Daniel Z. Li
  3. The Imperfect Beliefs Voting Model By Benjamin Ogden
  4. Risk aversion and prudence in contests By Sahm, Marco
  5. Equilibrium Competition, Social Welfare and Corruption in Procurement Auctions By Daniel Z. Li; Minbo Xu
  6. Pricing and Referrals in Diffusion on Networks By Matt V. Leduc; Matthew O. Jackson; Ramesh Johari
  7. Constrained Efficiency with Adverse Selection and Directed Search By Mohammad Davoodalhosseini
  8. Manipulation of Cursed Beliefs in Online Reviews By Ludmila Matyskova; Jan Sipek
  9. The Political Economy of Heterogeneity and Conflict By Enrico Spolaore; Romain Wacziarg
  10. Are sequential round-robin tournaments discriminatory? By Sahm, Marco
  11. Price Discrimination and Dispersion under Asymmetric Profiling of Consumers By Paul Belleflamme; Wing Man Wynne Lam; Wouter Vergote
  12. Serial Dictatorship Mechanisms with Reservation Prices By Bettina Klaus; Alexandru Nichifor
  13. A Note on "Renegotiation in Repeated Games" [Games Econ. Behav. 1 (1989) 327–360] By Günther, Michael
  14. Advertising Response to New Entry By Azamat Valei
  15. A Model of Focusing in Political Choice By Salvatore Nunnari; Jan Zapal

  1. By: Riedel, Frank (Center for Mathematical Economics, Bielefeld University); Tallon, Jean-Marc (Center for Mathematical Economics, Bielefeld University); Vergopoulos, Vassili (Center for Mathematical Economics, Bielefeld University)
    Abstract: This paper extends decision theory under imprecise probabilistic information to dynamic settings. We explore the relationship between the given objective probabilistic information, an agent's subjective multiple priors, and updating. Dynamic consistency implies rectangular sets of priors at the subjective level. As the objective probabilistic information need not be consistent with rectangularity at the subjective level, agents might select priors outside the objective probabilistic information while respecting the support of the given set of priors. Under suitable additional axioms, the subjective set of priors belongs to the rectangular hull of the objective probabilistic information.
    Keywords: Imprecise information, imprecision aversion, multiple priors, dynamic consistency
    Date: 2017–04–27
  2. By: Ian Jewitt (Oxford University); Daniel Z. Li (Durham Business School)
    Abstract: This paper explores the possibilities for sellers to usefully transmit product information to buyers by cheap talk public advertising. We explore two polar cases, contrasting vertically differentiated products (a la Milgrom Weberís (1982) general symmetric model) with horizontally di§erentiated products (a la Hotellingís (1929) line). We consider both the message only case and where reserve price-message pairs can be chosen by the seller. For horizontally di§erentiated products partitional messageonly informative equilibria are shown to exist providing the number of bidders is sufficiently large. The equilibrium is characterized by more precise information provided for less popular product attributes. The seller optimal disclosure policy displays a complementarity relationship between the number of bidders and the amount of product information disclosed. In contrast, for the vertically di§erentiated products benchmark, message-only informative equilibria do not exist. With reserve prices, informative equilibria exist in both cases. For the vertical case these equilibria yield lower seller revenue than uninformative equilibria. In the horizontal case with sufficiently large number of bidders higher revenue is possible and full disclosure becomes feasible and seller optimal in the limit.
    Keywords: Cheap Talk; Information Disclosure; Auction; Horizontal Differentiation; Vertical Differentiation; Informative Equilibrium
    JEL: D44 D82 D83 L10 M37
    Date: 2017–04
  3. By: Benjamin Ogden
    Abstract: In real-life elections, voters do not have full information over the policy platforms proposed by political parties. Instead, they form (imprecise) beliefs. I propose a new model of partisan competition to represent the interaction of these beliefs with platform selection. Both parties gain more from appealing to the voters with more precise beliefs over their platform. Minority candidates viewed with less precision overall gain relatively more from outliers. Therefore, the Median Voter Theorem is recovered if and only if voters’ policy preferences are uncorrelated with the precision of their beliefs about each candidate, and preferences are distributed symmetrically. Otherwise, even election-motivated parties diverge away from each other. As the population becomes polarized in how they form beliefs about politics, they will become polarized on political grounds as well, providing a new explanation for recent political polarization in the United States which, under reasonable assumptions, is more in line with the stylized facts than models with perfect observability.
    Keywords: cultural distance; imperfect communication; inequality; polarization; policy divergence; redistribution; social groups; voter beliefs
    Date: 2017–04
  4. By: Sahm, Marco
    Abstract: I examine the impact of risk preferences on efforts and winning probabilities in generalised Tullock contests between two players. The theoretical analysis yields two main results. First, I specify a sufficient condition on the agents' comparative prudence under which a higher common level of risk aversion leads to lower aggregate effort in symmetric contests. Second, I show that for a certain range of parameters in asymmetric contests, higher risk-aversion will be a disadvantage if the agent is comparatively prudent.
    Keywords: Tullock Contest,Risk Aversion,Prudence
    JEL: C72 D72
    Date: 2017
  5. By: Daniel Z. Li (Durham Business School); Minbo Xu (Beijing Normal University)
    Abstract: We study the effects of corruption on equilibrium competition and social welfare in a public procurement auction. In our model, firms are invited to the auction at positive costs, and a bureaucrat who runs the auction on behalf of a government may request a bribe from the winning Örm. We Örst present the over-invitation results in the absence of corruption, in which more than a socially optimal number of firms will be invited. Second, we show that the e§ects of corruption on equilibrium outcomes vary across di§erent forms of bribery. For a Öxed bribe, corruption has no e§ect on equilibrium competition, although it does induce social welfare loss. For a proportional bribe, a corrupt bureaucrat may invite fewer or more firms to the auction depending on how much he weights his personal interest relative to the government payoff. Thus, corruption may result in either Pareto-improving or deteriorating allocations. Finally, we show that information disclosure may consistently induce more firms to be invited, regardless of whether there is corruption.
    Keywords: procurement auction; competition; corruption; Öxed bribe; proportional bribe
    JEL: D44 D73 H57
    Date: 2017–04
  6. By: Matt V. Leduc; Matthew O. Jackson; Ramesh Johari
    Abstract: When a new product or technology is introduced, potential consumers can learn its quality by trying the product, at a risk, or by letting others try it and free-riding on the information that they generate. We propose a dynamic game to study the adoption of technologies of uncertain value, when agents are connected by a network and a monopolist seller chooses a policy to maximize profits. Consumers with low degree (few friends) have incentives to adopt early, while consumers with high degree have incentives to free ride. The seller can induce high-degree consumers to adopt early by offering referral incentives - rewards to early adopters whose friends buy in the second period. Referral incentives thus lead to a `double-threshold strategy' by which low and high-degree agents adopt the product early while middle-degree agents wait. We show that referral incentives are optimal on certain networks while inter-temporal price discrimination (i.e., a first-period price discount) is optimal on others, and discuss welfare implications.
    Date: 2015–09
  7. By: Mohammad Davoodalhosseini
    Abstract: Constrained efficient allocation (CE) is characterized in a model of adverse selection and directed search (Guerrieri, Shimer, and Wright (2010)). CE is defined to be the allocation that maximizes welfare, the ex-ante utility of all agents, subject to the frictions of the environment. When equilibrium does not achieve the first best (the allocation that maximizes welfare under complete information), then welfare in the CE is strictly higher than welfare in the equilibrium allocation. That is, equilibrium is not constrained efficient. Under some conditions, welfare in the CE even attains welfare in the first best. Finally, sufficient conditions are provided under which equilibrium is not constrained Pareto efficient, either. Cross-subsidization is the key to all these results. In an asset market application, the first best is shown to be implementable through tax schedules that are monotone in the asset prices.
    Keywords: Economic models, Financial markets, Financial system regulation and policies, Market structure and pricing
    JEL: D82 D83 E24 G1 J31 J64
    Date: 2017
  8. By: Ludmila Matyskova; Jan Sipek
    Abstract: Consumer reviews may have perverse effects, including delays of adoption in new products of unknown quality when consumers are boundedly rational. When consumers fail to take into account that past reviewers self-select to purchases, a monopolist may manipulate the posterior beliefs of consumers who observe the reviews, because the product price determines the self-selection bias. The monopolist will charge a relatively high price because the positive selection of the early adopters increases the quality reported in the reviews.
    Keywords: cursed equilibrium; online social learning; two-sided learning
    JEL: D42 D82 D83 L15
    Date: 2017–04
  9. By: Enrico Spolaore; Romain Wacziarg
    Abstract: We present a conceptual framework linking cultural heterogeneity to inter-group conflict. When conflict is about control of public goods, more heterogeneous groups are expected to fight more with each other. In contrast, when conflict is about rival goods, more similar groups are more likely to engage in war with each other. We formalize these ideas within an analytical model and discuss recent empirical studies that are consistent with the model's implications.
    JEL: D74 H56 N40
    Date: 2017–03
  10. By: Sahm, Marco
    Abstract: I examine sequential round-robin tournaments with three and four symmetric players. Each player is matched once with each other player. If the matches are organized as Tullock contests (all-pay auctions), the tournament will be almost fair (highly discriminatory): subject to the position of their matches in the sequence of the tournament, the differences in players' ex-ante winning probabilities and expected payoffs will be small (large). The differing results originate from the higher discriminating power of the all-pay auction. Moreover, the resulting discouragement effect in tournaments with all-pay auctions implies lower aggregate effort than in tournaments with suitable Tullock contests. The fairness of round-robin tournaments may be improved by the use of an endogenous sequence of matches or the requirement that players fix their effort ex-ante.
    Keywords: Sequential Round-Robin Tournament,Contest Success Function,Discriminatory Power,Tullock Contest,All-Pay Auction
    JEL: C72 D72 Z20
    Date: 2017
  11. By: Paul Belleflamme (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille); Wing Man Wynne Lam (University of Liège); Wouter Vergote (CEREC, University Saint-Louis)
    Abstract: Two duopolists compete in price on the market for a homogeneous product. They can use a 'profiling technology' that allows them to identify the willingness-to-pay of their consumers with some probability. If both firms have profiling technologies of the exact same precision, or if one firm cannot use any profiling technology, then the Bertrand paradox continues to prevail. Yet, if firms have technologies of different precisions, then the price equilibrium exhibits both price discrimination and price dispersion, with positive expected profits. Increasing the precision of both firms’ technologies does not necessarily harm consumers.
    Keywords: price discrimination, price dispersion, Bertrand competition
    JEL: D11 D18 L12 L86
    Date: 2017–04
  12. By: Bettina Klaus; Alexandru Nichifor
    Abstract: We propose a new set of mechanisms, which we call serial dictatorship mechanisms with reservation prices for the allocation of one indivisible good. We show that a mechanism satisfies minimal tradability, individual rationality, strategy-proofness, consistency, and non wasteful tie-breaking if and only if there exists a reservation price vector and a priority ordering such that the mechanism is a serial dictatorship mechanism with reservation prices. We obtain a second characterization by replacing individual rationality with non-imposition. In both our characterizations the reservation price vector, the priority ordering, and the mechanism are all found simultaneously and endogenously from the properties. In addition, we show that in our model a mechanism satisfies Pareto efficiency, strategy-proofness, and consistency if and only if it is welfare equivalent to a classical serial dictatorship. Finally, we illustrate how the normative requirements governing the functioning of some real life markets and the mechanisms that these markets use are reasonably well captured by our model and results.
    Keywords: serial dictatorship; individual reservation prices; strategy-proofness; consistency
    JEL: C78 D47 D71
    Date: 2017–05
  13. By: Günther, Michael (Center for Mathematical Economics, Bielefeld University)
    Abstract: In Farrell and Maskin (1989), the authors present sufficient conditions for weakly renegotiation-proof payoffs in their Theorem 1 (p. 332). We show that a step in the proof of this theorem is not correct by giving a counterexample. Nevertheless, the sufficient conditions remain true, and we offer a correction of the proof.
    Keywords: (Weak) Renegotiation-Proofness, Infinitely Repeated Games
    Date: 2017–04–12
  14. By: Azamat Valei
    Abstract: Empirical studies on advertising outlays report that incumbent firms change their advertising strategies in response to a new entry. While some incumbents reduce their advertising expenditures, others increase them in comparison to the preentry period. Existing literature on strategic advertising in entry games is mostly focused on entry deterrence, meanwhile no theoretical foundation is found in this literature to explain what determines a change in the advertising strategies in the case of entry accommodation. The present work considers four types of advertising and builds a model that examines how accommodating incumbents decide on advertising. The paper also provides results on how advertising is related to the size of the entry. Particularly, informative advertising and advertising enhancing product differentiation allow greater entry, while complementary and business-stealing advertising result in fewer entries since they reduce residual demand for potential entrants. Depending on whether post-entry competition variables are strategic substitutes or strategic complements, incumbent firms may increase or reduce their advertising outlays in response to new entries.
    Keywords: advertising; entry accommodation; industrial organization;
    JEL: D43 L13
    Date: 2017–04
  15. By: Salvatore Nunnari; Jan Zapal
    Abstract: This paper develops a theoretical model of voters' and politicians' behavior based on the notion that voters focus disproportionately on, and hence overweight, certain attributes of policies. We assume that policies have two attributes and that voters focus more on the attribute in which their options differ more. First, we consider exogenous policies and show that voters' focusing polarizes the electorate. Second, we consider the endogenous supply of policies by office-motivated politicians who take voters' distorted focus into account. We show that focusing leads to inefficient policies, which cater excessively to a subset of voters: social groups that are larger, have more distorted focus, are more moderate, and are more sensitive to changes in a single attribute are more in uential. Finally, we show that augmenting the classical models of voting and electoral competition with focusing can contribute to explain puzzling stylized facts as the inverse correlation between income inequality and redistribution or the backlash effect of extreme policies.
    Keywords: focus; attention; salience; political polarization; probabilistic voting model; electoral competition; behavioral political economy; income inequality; redistribution;
    JEL: D03 D72 D78
    Date: 2017–04

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