nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒09‒24
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. How Efficient is Dynamic Competition? The Case of Price as Investment By Besanko, David; Doraszelski, Ulrich; Kryukov, Yaroslav
  2. Market Power and Welfare in Asymmetric Divisible Good Auctions By Manzano, Carolina; Vives, Xavier
  3. Condorcet versus participation criterion in social welfare rules By Can, Burak; Ergin, Emre; Pourpouneh, Mohsen
  4. Team Incentives under Moral and Altruistic Preferences: Which Team to Choose? By Sarkisian, Roberto
  5. Conformity Preferences and Information Gathering Effort in Collective Decision Making By Huihui Ding
  6. Ambiguity and the Centipede Game: Strategic Uncertainty in Multi-Stage Games By Jürgen Eichberger; Simon Grant; David Kelsey
  7. Impact of Managerial Commitment on Risk Taking with Dynamic Fund Flows By Kaniel, Ron; tompaidis, stathis; Zhou, Ti
  8. An Optimal ICO Mechanism By Cerezo Sánchez, David
  9. Political participation and party capture in a dualized economy: A game theory approach By Kellermann, Kim Leonie
  10. On the Profitability of Interfirm Bundling in Oligopolies By Sang-Hyun Kim; Jong-Hee Hahn
  11. Wholesale Pricing with Incomplete Information about Private Label Products By Johannes Paha
  12. Denial vs. Punishment: Strategies Shape War, but War Itself Affects Strategies By Nakao, Keisuke
  13. Choice with Time By João V. Ferreira; Nicolas Gravel
  14. Spillover and R&D Incentives under Incomplete Information in a Duopoly Industry By Chatterjee, Rittwik; Chattopadhyay, Srobonti; Kabiraj, Tarun
  15. Negative consumer value and loss leading By Caprice, Stéphane; Shekhar, Shiva
  16. An Impossibility Result on Nudging Grounded in the Theory of Intentional Action By Sergio Beraldo
  17. Rational Inattention and Sequential Information Sampling By Benjamin Hébert; Michael Woodford
  18. Strategic Behavior of Moralists and Altruists, By Alger, Ingela; Weibull, Jörgen W.

  1. By: Besanko, David; Doraszelski, Ulrich; Kryukov, Yaroslav
    Abstract: We study industries where the price that a firm sets serves as an investment into lower cost or higher demand. We assess the welfare implications of the ensuing competition for the market using analytical and numerical approaches to compare the equilibria of a learning-by-doing model to the first-best planner solution. We show that dynamic competition leads to low deadweight loss. This cannot be attributed to similarity between the equilibria and the planner solution. Instead, we show how learning-by-doing causes the various contributions to deadweight loss to either be small or partly offset each other
    Keywords: competition for the market; industry dynamics; Markov perfect equilibrium; Predatory Pricing; price as investment; welfare
    Date: 2017–09
  2. By: Manzano, Carolina; Vives, Xavier
    Abstract: We analyze a divisible good uniform-price auction that features two groups each with a Önite number of identical bidders. At equilibrium the relative market power (price impact) of a group increases with the precision of its private information and declines with its transaction costs. An increase in transaction costs and/or a decrease in the precision of a bidding groupís information induces a strategic response from the other group, which thereafter attenuates its response to both private information and prices. A "stronger" bidding group -which has more precise private information, faces lower transaction costs, and is more oligopsonistic- has more price impact and so will behave competitively only if it receives a higher per capita subsidy rate. When the strong group values the asset no less than the weak group, the expected deadweight loss increases with the quantity auctioned and also with the degree of payo§ asymmetries. Price impact and the deadweight loss may be negatively associated. The results are consistent with the available empirical evidence. KEYWORDS: demand/supply schedule competition, private information, liquidity auctions, Treasury auctions, electricity auctions, market integration. JEL: D44, D82, G14, E58
    Keywords: Teoria de la informació (Economia), Mercat -- Anàlisi, Bancs centrals, Subhastes, 33 - Economia,
    Date: 2017
  3. By: Can, Burak (General Economics 1 (Micro)); Ergin, Emre (General Economics 0 (Onderwijs)); Pourpouneh, Mohsen (sharif university of technology)
    Abstract: Moulin (1988) shows that there exists no social choice rule, that satisfies the following two criteria at the same time: the Condorcet criterion and the participation criterion, a.k.a., No Show Paradox. We extend these criteria to social welfare rules, i.e., rules that choose rankings for each preference profile. We show that the impossibility does not hold, and one particular rule, the Kemeny rule satisfies both the Condorcet and the participation criteria.
    Keywords: condorcet criterion, participation criterion, social choice rules, social welfare rules
    JEL: D71
    Date: 2017–09–14
  4. By: Sarkisian, Roberto
    Abstract: This paper studies incentives provision when agents are characterized either by homo moralis preferences (Alger and Weibull, 2013, 2016), i.e. their utility is represented by a convex combination of selfish preferences and Kantian morality, or by altruism. In a moral hazard in teams setting with two agents whose efforts affect output stochastically, I demonstrate that the power of extrinsic incentives decreases with the degrees of morality and altruism displayed by the agents, thus leading to increased profits for the principal. I also show that a team of moral agents will only be preferred if the production technology exhibits decreasing returns to efforts, the probability of a high realization of output conditional on both agents exerting effort is suficiently high and either the outside option for the agents is zero or the degree of morality is suficiently low.
    Keywords: Moral hazard in teams; optimal contracts; homo moralis preferences;altruism
    JEL: D03 D82 D86
    Date: 2017–08
  5. By: Huihui Ding
    Abstract: Our study concerns a collective decision-making model for the collection of information from two voters. Both voters, who tend to make the same voting choices because of their conformity preferences, collect information about the consequences of a project and then vote on the project. We focus on an informative equilibrium in which voters vote informatively using pure strategies. This is a symmetric Nash equilibrium. Our result is interesting as it shows that nonconformist voters exert less effort from a social perspective because of a positive externality that results in the free-rider problem, while conformity preferences can help to improve the sum of the votersâ expected payoffs from the social perspective. This is because conformity preferences may alleviate the free-rider problem associated with coordination (making the same vote). Specifically, conformity preferences give special importance to the correlation between votersâ signals, even if this correlation is unrelated to the accuracy of the signals. Furthermore, we present the exact conformity preference level which helps voters to exert an optimal effort level that maximizes the sum of the votersâ expected payoffs compared to the nonconformist case. In addition, we graphically illustrate comparative statics on effort levels in informative equilibria.
    JEL: D72 D82
    Date: 2017–08–28
  6. By: Jürgen Eichberger (Alfred Weber Institut, Universität Heidelberg.); Simon Grant (Research School of Economics, Australian National University.); David Kelsey (Department of Economics, University of Exeter)
    Abstract: We propose a solution concept for a class of extensive form games with ambiguity. Speci?cally we consider multi-stage games. Players have CEU preferences. The associated ambiguous beliefs are revised by Generalized Bayesian Updating. We assume individuals take account of possible changes in their preferences by using consistent planning. We show that if there is ambiguity in the centipede game it is possible to sustain ?cooperation? for many periods as part of a consistent-planning equilibrium under ambiguity. In a non-cooperative bargaining game we show that ambiguity may be a cause of delay in bargaining.
    Keywords: optimism, neo-additive capacity, dynamic consistency, consistent planning, centipede game, multi-stage game.
    JEL: D81
    Date: 2017
  7. By: Kaniel, Ron; tompaidis, stathis; Zhou, Ti
    Abstract: We present a model with dynamic investment flows, where fund managers have the ability to generate excess returns and study how forcing them to commit part or all of their personal wealth to the fund they manage affects fund risk taking. We contrast the behavior of a manager that may invest her personal wealth in a private account to a manager that is either forced to commit her wealth to the fund she manages, or a manager who is not allowed to hold risky assets held by the fund privately. We show that a fund managed by a manager with higher ability does not necessarily achieve higher expected returns but achieves lower idiosyncratic volatility. For a manager with constant ability, restrictions placed on her personal account do not influence her choices in the fund, while for a manager whose ability varies stochastically they result in higher expected returns and idiosyncratic volatilities. Fund strategies can be non-monotone both in the manager's commitment level and the ratio of manager to investor wealth. Our results are robust to incomplete information and to competing managers with correlated ability.
    Keywords: commitment; flows; mutual fund; portfolio
    Date: 2017–09
  8. By: Cerezo Sánchez, David
    Abstract: Initial Coin Offerings (ICOs) are raising billions in funding using multiple strategies, none justified from the point of view of mechanism design, resulting in severe underpricing and high volatility. In the present paper, an optimal ICO mechanism is proposed for the first time: a truthful multi-unit Vickrey-Dutch auction of callable tokens (i.e., a new hybrid security of tokens packaged with callable warrants). Truthful bidding is an ex-post Nash equilibrium strategy and the auction terminates with an ex-post efficient allocation; additionally, the callability of the warrants eliminates the winner’s curse of the auction and its underpricing. An implementation demonstrates its practical viability.
    Keywords: Optimal ICO, mechanism design, multi-unit auction, callable warrant, cryptoeconomics
    JEL: C72 D44 D82 G23 G24 G32 L26 O33
    Date: 2017–09–09
  9. By: Kellermann, Kim Leonie
    Abstract: This paper examines the link of political participation and employment status in a dualized labor market. Both insiders and outsiders can actively take part in political decision-making, e.g. by voting for a certain party. Insiders only have the resources to also provide financial donations to policy-makers. Future policy outcomes are determined in a dynamic two-stage game. First, individuals choose their optimal quantity of support depending on policy strategies. Second, parties determine their optimal policy platform anticipating the individual behavior. In order to collect donations, parties are incentivized to occupy an insider-friendly position. Thereby, insiders are encouraged to participate in politics while outsiders are discouraged. Labor market dualization opens up a gap in political involvement which induces a reinforcement of economic segmentation. However, party capture by insiders is weaker, the more strongly a party is originally tied to outsiders. With two parties competing for support and donations, political inequality becomes firmly established since both parties fully adopt the insiders' preferences.
    JEL: D71 D72 J42 P16
    Date: 2017
  10. By: Sang-Hyun Kim (Yonsei University); Jong-Hee Hahn (Yonsei University)
    Abstract: This paper examines the pro?tability of bundling or exclusive dealing among independent ?rms selling di¢´erentiated products. We show that, compared with separate sales, inter?rm bundling generally raises prices and is more pro?table provided the distribution of consumer valuations for products are su¡Ë ciently sym- metric and centered in the middle. Hence the ?rms have mutual incentives to o¢´er their products as a bundle or make exclusive dealing arrangements. We shed new light on the role of bundling in relaxing competition in oligopoly, the importance of which has been neglected in the previous literatures.
    Keywords: inter?rm bundling, (in)compatibility, exclusive dealing, antitrust
    JEL: L11 L13
    Date: 2017–09
  11. By: Johannes Paha (Justus-Liebig-University Giessen)
    Abstract: This article provides a theoretical model analyzing wholesale pricing tariffs set by a monopolistic manufacturer for its branded product that is sold to final customers by a monopolistic retailer. The bargaining power of the downstream retailer is strengthened by offering also a vertically differentiated private label product whose production costs are known only incompletely to the upstream manufacturer. The model shows that the manufacturer can avoid double marginalization and implement the full information outcome by combining a quantity discount with a market-share discount where only a retailer with a strong private label retroactively receives an allowance. Under these circumstances it is unprofitable for the manufacturer to impose exclusive dealing on the retailer.
    Keywords: Branded Products, Incomplete Information, Market-Share Discounts, Private Label Products, Wholesale Pricing
    JEL: D42 D82 L15 L42
    Date: 2017
  12. By: Nakao, Keisuke
    Abstract: Formal models of war termination have been developed along two major approaches: in one, war is interpreted as a series of battles, where belligerents exchange denial campaigns; in the other, war is illustrated as a process of bargaining with mutual punishments. In integrating these two approaches, we build a dynamic model of war, where two belligerents choose to attack each other on either force or value in every period. In the early stage of war when military strength is balanced between the belligerents, they both conduct (counterforce) denial campaigns. However, toward the end when one side has depleted its capabilities of fighting, the other side switches to (countervalue) punishment campaigns to coerce the opponent into capitulation. Accordingly, while denials largely determine a war's outcome, punishments can influence its duration. Unlike existing studies, our theory illuminates the two-way causal relationship, where military strategies shape war, while war itself affects the strategies.
    Keywords: aerial bombardment, choice of target, counterforce vs. countervalue, denial vs. punishment, military strategy, reverse causality, use of force
    JEL: D74 F51
    Date: 2017–09–16
  13. By: João V. Ferreira (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille); Nicolas Gravel (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille)
    Abstract: We propose a framework for the analysis of choice behavior when the later explicitly depends upon time. We relate this framework to the traditional setting from which time is absent. We illustrate the usefulness of the introduction of time by proposing three possible models of choice behavior in such a framework: (i) changing preferences, (ii) preference formation by trial and error, and (iii) choice with endogenous status-quo bias. We provide a full characterization of each of these three choice models by means of revealed preference-like axioms that could not be formulated in a timeless setting.
    Keywords: choice behavior, time, revealed preferences, changing preferences, learning by trial-and-error, inertia bias
    Date: 2017–07
  14. By: Chatterjee, Rittwik; Chattopadhyay, Srobonti; Kabiraj, Tarun
    Abstract: Spillover of R&D results in oligopolistic industries may affect the R&D decisions of firms. How much a newly eveloped technology by a firm gets spilled over to its rival firms may or may not be observable by the concerned firm. This paper considers a two stage game involving two firms. In the first stage the firms decide whether to invest in R&D and in the next stage they compete in a Cournot duopoly market. The R&D incentives of firms are compared under alternative assumptions of complete and incomplete information scenarios involving general distribution function of types. The results indicate that the impact of availability of more information regarding rival’s ability to benefit from spilled over knowledge on R&D activities of firms is ambiguous.
    Keywords: R&D incentives, Duopoly, Asymmetric information, Spillover, Type distribution
    JEL: D43 D82 L13 O31
    Date: 2017–06–01
  15. By: Caprice, Stéphane; Shekhar, Shiva
    Abstract: Large retailers competing with smaller stores that carry a narrower range can exercise market power by pricing below cost for some of their products. Below-cost pricing arises as an exploitative device rather than a predatory device (e.g., Chen and Rey, 2012). Unlike standard textbook models, we show that positive consumer value is not required in these frameworks. Large retailers can sell products offering consumers a negative value. We use this insight to revisit some classic issues in vertical relations.
    Keywords: Multi-product retailers; loss-leading; negative consumer value
    JEL: L13 L81
    Date: 2017–08
  16. By: Sergio Beraldo (Università di Napoli Federico II and CSEF)
    Abstract: I offer an impossibility result on nudging grounded in the theory of intentional action. I prove that if individuals are not open to money-pump manipulation and nudges are motivationally irrelevant, any induced choice is unintentional and just reflects the preferences of the choice architect. Autonomy is therefore violated, and nudging proves to be inconsistent with liberal principles at a fundamental level.
    Keywords: Nudging, Manipulation, Autonomy
    JEL: D03 D6
    Date: 2017–09–15
  17. By: Benjamin Hébert; Michael Woodford
    Abstract: We propose a new principle for measuring the cost of information structures in rational inattention problems, based on the cost of generating the information used to make a decision through a dynamic evidence accumulation process. We introduce a continuous-time model of sequential information sampling, and show that, in a broad class of cases, the choice frequencies resulting from optimal information accumulation are the same as those implied by a static rational inattention problem with a particular static information-cost function. Among the static cost functions that can be justified in this way is the mutual information cost function proposed by Sims (2010), but we show that other cost functions can be micro-founded in this way as well. In particular, we introduce a class of “neighborhood-based” cost functions, which make it more costly to undertake experiments that can produce different results in similar states, and show that the predictions of this alternative rational inattention theory better conform with evidence from perceptual discrimination experiments.
    JEL: D83
    Date: 2017–09
  18. By: Alger, Ingela; Weibull, Jörgen W.
    Abstract: Does altruism and morality lead to socially better outcomes in strategic interactions than selfishness? We shed some light on this complex and non-trivial issue by examining a few canonical strategic interactions played by egoists, altruists and moralists. By altruists we mean people who do not only care about their own material payoffs but also about those to others, and by a moralist we mean someone who cares about own material payoff and also about what would be his or her material payoff if others were to act like himself or herself. It turns out that both altruism and morality may improve or worsen equilibrium outcomes, depending on the nature of the game. Not surprisingly, both altruism and morality improve the outcomes in standard public goods games. In infinitely repeated games, however, both altruism and morality may diminish the prospects of cooperation, and to different degrees. In coordination games, morality can eliminate socially inefficient equilibria while altruism cannot.
    Keywords: altruism; morality; Homo moralis; repeated games; coordination games
    JEL: C73 D01 D03
    Date: 2017–08

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