nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒09‒10
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Learning and Equilibrium Refinements in Signalling Games By Drew Fudenberg; Kevin He
  2. Probabilistic opinion pooling generalized. Part two: The premise-based approach By Franz Dietrich; Christian List
  3. All-pay auctions with affiliated values. By Chi, Chang Koo; Murto, Pauli; Välimäki, Juuso
  4. Self-Allocation in Contests By Bernergård, Axel; Wärneryd, Karl
  5. Securing Basic Well-being for All By Gotoh, Reiko; Yoshihara, Naoki
  6. Contests as selection mechanisms: The impact of risk aversion By March, Christoph; Sahm, Marco
  7. Axiomatic and bargaining foundations of an allocation rule for ordered tree TU-games By Sylvain Béal; Sylvain Ferrières; Eric Rémila; Phillippe Solal
  8. Monopsony Theory Revisited By Xavier Méra
  9. Optimal Licensing of Technology in the Face of (Asymmetric) Competition By Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
  10. Per Unit vs. Ad Valorem Royalty Licensing By Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
  11. Credit from the Monopoly Bank By Yvan Lengwiler; Kumar Rishabh
  12. Large Spatial Competition By Matias Nunez; Marco Scarsini
  13. A Generalization of the Harsanyi NTU Value to Games with Incomplete Information By Andrés Salamanca
  14. Prominence, Complexity, and Pricing By Chioveanu, Ioana
  15. On Basu’s Proposal: Fines Affect Bribes By Popov, Sergey V. Popov
  16. Privacy and Platform Competition By Philipp Dimakopoulos; Slobodan Sudaric
  17. Incomplete Contracts, Shared Ownership, and Investment Incentives By Schmitz, Patrick W.

  1. By: Drew Fudenberg; Kevin He
    Abstract: We propose two new signalling-game refinements that are microfounded in a model of patient Bayesian learning. Agents are born into player roles and play the signalling game against a random opponent each period. Inexperienced agents know their opponents' payoff functions but not the prevailing distribution of opponents' play. One refinement corresponds to an upper bound on the set of possible learning outcomes while the other provides a lower bound. Both refinements are closely related to divine equilibrium (Banks and Sobel, 1987).
    Date: 2017–08
  2. By: Franz Dietrich (PSE - Paris School of Economics, CNRS - Centre National de la Recherche Scientifique); Christian List (LSE - London School of Economics and Political Science)
    Abstract: How can several individuals' probability functions on a given-algebra of events be aggregated into a collective probability function? Classic approaches to this problem usually require 'event-wise independence': the collective probability for each event should depend only on the individuals' probabilities for that event. In practice, however, some events may be 'basic' and others 'derivative', so that it makes sense first to aggregate the probabilities for the former and then to let these constrain the probabilities for the latter. We formalize this idea by introducing a 'premise-based' approach to probabilistic opinion pooling, and show that, under a variety of assumptions, it leads to linear or neutral opinion pooling on the 'premises'.
    Keywords: Probabilistic opinion pooling,judgment aggregation,subjective probability,premise-based aggregation
    Date: 2017
  3. By: Chi, Chang Koo (Dept. of Economics, Norwegian School of Economics and Business Administration); Murto, Pauli (Aalto University School of Business); Välimäki, Juuso (Aalto University School of Business)
    Abstract: This paper analyzes all-pay auctions where the bidders have affiliated values for the object for sale and where the signals take binary values. Since signals are correlated, high signals indicate a high degree of competition in the auction and since even losing bidders must pay their bid, non-monotonic equilibria arise. We show that the game has a unique symmetric equilibrium, and that whenever the equilibrium is non-monotonic the contestants earn no rents. All-pay auctions result in low expected rents to the bidders, but also induce inefficient allocations in models with affiliated private values. With two bidders, the effect on rent extraction dominates, and all-pay auction outperforms standard auctions in terms of expected revenue. With many bidders, this revenue ranking is reversed for some parameter values and the inefficient allocations persist even in large auctions.
    Keywords: All-pay auctions; common values; affiliated signals
    JEL: D44 D82
    Date: 2017–06–17
  4. By: Bernergård, Axel (Department of Social Sciences); Wärneryd, Karl (Dept. of Economics)
    Abstract: We consider contestants who must choose exactly one contest, out of several, to participate in. We show that when the contest technology is of a certain type, or when the number of contestants is large, a self-allocation equilibrium, i.e., one where no contestant would wish to change his choice of contest, results in the allocation of players to contests that maximizes aggregate equilibrium effort. For a class of oligopoly models that are equivalent to contests, this implies output maximization.
    Keywords: Contests; self-allocation; effort maximization; quantity competition.
    JEL: C72 D43 D44 D72 D74 L13
    Date: 2017–08–27
  5. By: Gotoh, Reiko; Yoshihara, Naoki
    Abstract: The purpose of this paper is to examine the possibility of a social choice rule to implement a social policy for “securing basic well-being for all.” The paper introduces a new scheme of social choice, called a social relation function (SRF), which associates a reflexive and transitive binary relation over a set of social policies to each profile of individual well-being appraisals and each profile of group evaluations. As part of the domains of SRFs, the available class of group evaluations is constrained by three conditions. Furthermore, the non-negative response (NR) and the weak Pareto condition (WP) are introduced. NR demands giving priority to group evaluation, while treating the groups as formally equal relative to each other. WP requires treating impartially the well-being appraisals of all individuals. In conclusion, this paper shows that under some reasonable assumptions, there exists an SRF that satisfies NR and WP.
    Keywords: basic well-being, individual well-being appraisals, social relation functions
    JEL: D63
    Date: 2017–09
  6. By: March, Christoph; Sahm, Marco
    Abstract: We investigate how individual risk preferences affect the likelihood of selecting the more able contestant within a two-player Tullock contest. Our theoretical model yields two main predictions: First, an increase in the risk aversion of a player worsens her odds unless she already has a sufficiently large advantage. Second, if the prize money is sufficiently large, a less able but less risk averse contestant can achieve an equal or even higher probability of winning than a more able but more risk averse opponent. In a laboratory experiment we confirm both, the non-monotonic impact and the compensating effect of risk aversion on winning probabilities. Our results suggest a novel explanation for the gender gap and the optimality of limited monetary incentives in selection contests.
    Keywords: Selection Contest,Risk Aversion,Competitive Balance,Gender Gap
    JEL: C72 D72 J31 K41 M51 M52
    Date: 2017
  7. 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 the class of tree TU-games augmented by a total order over the links which re ects the formation process of the tree. We rst characterize a new allocation rule for this class of cooperative games by means of three axioms, Standardness, Top-consistency and Link Amalgamation. Then, we provide a bargaining foundation for this allocation rule by designing a mechanism, including a bidding stage followed by a bargaining stage, which supports this allocation rule in subgame Nash equilibrium provided that the underlying game is superadditive.
    Keywords: Amalgamation, Bargaining, Consistency, Tree TU-games, Total order
    Date: 2017–07
  8. By: Xavier Méra (Granem - Groupe de Recherche ANgevin en Economie et Management - UA - Université d'Angers - AGROCAMPUS OUEST - Institut National de l'Horticulture et du Paysage)
    Abstract: Standard monopsony theory, old and new, lacks a realistic criterion to distinguish between monopsony and competitive prices. Consequently, prominent Austrian critics have by and large dismissed it. However, the idea that human action occurs in discrete steps, and consequently that the elasticity of the supply schedules for factors of production, as well as the elasticity of the demand schedules for their products, can be altered as a result of coercion, lead to a theory of "monopoly price-gap", with monopoly and monopsony prices as two features of the same phenomenon.
    Keywords: Monopsony, monopoly
    Date: 2017
  9. By: Cuihong Fan (Shanghai University of Finance and Economics); Byoung Heon Jun (Department of Economics, Korea University, Seoul, Republic of Korea); Elmar G. Wolfstetter (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: We reconsider the optimal licensing of technology by an incumbent firm in the presence of multiple potential licensees. In a first step we show that competition among potential licensees has a drastic effect on optimal two-part tariff contracts. We then introduce more general mechanisms and design a dynamic mechanism that extracts the maximum industry profit while reducing the potential licensees' payoff to the minimum level that they can assure themselves. That mechanism can be viewed as a generalized "chutzpah" mechanism, generalized because it employs royalties to maximize the industry profit. It awards licenses to all firms and prescribes maximum permitted royalty rates plus positive fixed fees.
    Keywords: Patent licensing, innovation, optimal contracts, dynamic mechanisms.
    JEL: D21 D43 D44 D45
    Date: 2017
  10. By: Cuihong Fan (Shanghai University of Finance and Economics); Byoung Heon Jun (Department of Economics, Korea University, Seoul, Republic of Korea); Elmar G. Wolfstetter (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: We consider the licensing of a non-drastic innovation by an innovator who interacts with a potential licensee in a downstream Cournot market. We compare two kinds of license contracts: per unit and ad valorem, combined with fixed fees. Assuming that antitrust authorities apply the same principle to review ad valorem royalty license contracts which they apply to per unit royalty license contracts, we show that per unit royalty licensing is more profitable if the licensor is more efficient in using the innovation, whereas ad valorem royalty licensing is more profitable if the licensee is more efficient. This explains why and when these licensing schemes should be observed.
    Keywords: Innovation, patent licensing, royalty contracts.
    JEL: D21 D43 D44 D45
    Date: 2017
  11. By: Yvan Lengwiler; Kumar Rishabh (University of Basel)
    Abstract: We establish that a monopoly bank never uses collateral as a screening device. A pooling equilibrium always exists in which all borrowers pay the same interest rate and put zero collateral. Absence of screening leads to socially inefficient lending in the sense that some socially productive firms are denied credit due to excessively high interest rate.
    Keywords: Monopoly bank, credit, contracts, screening, pooling, collateral
    JEL: G21 D82 L12 D00
    Date: 2017
  12. By: Matias Nunez (LAMSADE - Laboratoire d'analyse et modélisation de systèmes pour l'aide à la décision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique); Marco Scarsini (Dipartimento di Economia e Finanza - LUISS - Libera Università Internazionale degli Studi Sociali Guido Carli [Roma])
    Abstract: We consider spatial competition when consumers are arbitrarily distributed on a compact metric space. Retailers can choose one of finitely many locations in this space. We focus on symmetric mixed equilibria which exist for any number of retailers. We prove that the distribution of retailers tends to agree with the distribution of the consumers when the number of competitors is large enough. The results are shown to be robust to the introduction of (i) randomness in the number of retailers and (ii) different ability of the retailers to attract consumers.
    Keywords: Location,Equilibrium,Hotelling games,Large games,Poisson games,Valence
    Date: 2017
  13. By: Andrés Salamanca (TSE - Toulouse School of Economics - Toulouse School of Economics)
    Abstract: In this paper, we introduce a solution concept generalizing the Harsanyi non-transferable utility (NTU) value to cooperative games with incomplete information. The so-defined H-solution is characterized by virtual utility scales that extend the Harsanyi-Shapley fictitious weighted-utility transfer procedure. We construct a three-player cooperative game in which Myerson's [Cooperative games with incomplete information. Int. J. Game Theory, 13, 1984, pp. 69-96] generalization of the Shapley NTU value does not capture some "negative" externality generated by the adverse selection. However, when we explicitly compute the H-solution in this game, it turns out that it prescribes a more intuitive outcome taking into account the informational externality mentioned above.
    Keywords: incomplete information,virtual utility,Cooperative games
    Date: 2016–02–01
  14. By: Chioveanu, Ioana
    Abstract: This paper analyzes prominence in a homogeneous product market where two firms simultaneously choose both prices and price complexity levels. Complexity limits competing offers' comparability and results in consumer confusion. Confused consumers are more likely to buy from the prominent firm. In equilibrium there is dispersion in both prices and price complexity. The nature of equilibrium depends on prominence. Compared to its rival, the prominent firm makes higher profit, associates a smaller price range with lowest complexity, puts lower probability on lowest complexity, and sets a higher average price. However, higher prominence may benefit consumers and, conditional on choosing lowest complexity, the prominent firm's average price is lower, which is consistent with confused consumers' bias.
    Keywords: oligopoly markets, consumer confusion, prominence, price complexity, price dispersion
    JEL: D03 D43 L13
    Date: 2017–08–31
  15. By: Popov, Sergey V. Popov (Cardiff Business School)
    Abstract: I model the connection between the equilibrium bribe amount and the fines imposed on both bribe-taker and bribe-payer. I show that Basu’s (2011) proposal to lower the fines imposed on bribe-payers in order to induce more whistleblowing and increase the probability of penalizing corrupt government officials might instead increase bribe amounts. Higher expected fines on bribe-takers will make them charge larger bribes; at the same time, lowering fines for bribe-paying might increase bribe-payers’ willingness to pay bribes.
    Keywords: Bootstrap, indirect inference, gravity model, classical trade model, UK trade
    Date: 2017–09
  16. By: Philipp Dimakopoulos (Humboldt-Universität zu Berlin); Slobodan Sudaric (Humboldt-Universität zu Berlin)
    Abstract: We analyze platform competition where user data is collected to improve adtargeting. Considering that users incur privacy costs, we show that the equilibrium level of data provision is distorted and can be inefficiently high or low: if overall competition is weak or if targeting benefits are low, too much private data is collected, and vice-versa. Further, we find that softer competition on either market side leads to more data collection, which implies substitutability between competition policy effects on both market sides. Moreover, if platforms engage in two-sided pricing, data provision would be efficient.
    Keywords: platform competition, user data, nuisance costs, ad targeting, privacy
    JEL: D43 L13 L40 L86
    Date: 2017–08–07
  17. By: Schmitz, Patrick W.
    Abstract: Consider a partnership consisting of two symmetrically informed parties who may each own a share of an asset. It is ex post efficient that tomorrow the party with the larger valuation gets the asset. Yet, today the parties can make investments to enhance the asset's productivity. Contracts are incomplete, so today only the ownership structure can be specified, which may be renegotiated tomorrow. It turns out that shared ownership is often optimal. If the investments are embodied in the physical asset, it may be optimal that party B has a larger ownership share even when party A has a larger valuation and a better investment technology. When shared ownership is taken into account, joint ownership in the sense of bilateral veto power cannot be optimal, regardless of whether the investments are in human capital or in physical capital.
    Keywords: Incomplete Contracts; Investment incentives; partnership dissolution; Property rights; shared ownership
    JEL: C78 D23 D86 L24 O32
    Date: 2017–08

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