nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒04‒16
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Persuasion Meets Delegation By Anton Kolotilin; Andriy Zapechelnyuk
  2. Entry Games under Private Information By José-Antonio Espín-Sánchez; Álvaro Parra
  3. The Benefit of Collective Reputation By Zvika Neemam; Aniko Ory; Jungju Yu
  4. Spillovers and R&D Incentive under Incomplete Information By Chatterjee, Rittwik; Chattopadhyay, Srobonti; Kabiraj, Tarun
  5. The Survival and Demise of the State: A Dynamic Theory of Secession By Joan-Maria Esteban; Sabine Flamand; Massimo Morelli; Dominic Rohner
  6. Overburdened judges By Ludivine Roussey; Raphaël Soubeyran
  7. Consumers' Privacy Choices in the Era of Big Data By Prüfer, Jens; Dengler, Sebastian
  8. Media, Fake News, and Debunking By Ngo Van Long; Martin Richardson; Frank Stähler
  9. Beliefs and Consumer Search in a Vertical Industry By Maarten Janssen; Sandro Shelegia
  10. Robust Sequential Search By Karl Schlag; Andriy Zapechelnyuk
  11. Optimal Law Enforcement with Ordered Leniency By Landeo, Claudia; Spier, Kathryn
  12. Mergers and Demand-Enhancing Innovation By Bourreau, Marc; Jullien, Bruno; Lefouili, Yassine
  13. Initial Coin Offerings and the Value of Crypto Tokens By Christian Catalini; Joshua S. Gans
  14. The Political Economy of Ideas By Mukand, Sharun W.; Rodrik, Dani
  15. Price-Quality Competition in a Mixed Duopoly By Klumpp, Tilman; Su, Xuejuan
  16. Input price discrimination with differentiated final products By Jong-Hee Hahn; Chan KIm
  17. Decentralized bargaining in matching markets: efficient stationary equilibria and the core By Elliott, Matt; Nava, Francesco

  1. By: Anton Kolotilin (UNSW Business School); Andriy Zapechelnyuk (University of St Andrews)
    Abstract: There are two common ways for a principal to influence the decision making of an agent. One is to manipulate the agent's information (persuasion problem). Another is to limit the agent's decisions (delegation problem). We show that, under general assumptions, these two problems are equivalent; so solving one problem solves the other. We illustrate how the methods developed in the persuasion literature can be applied to address unsolved delegation problems by considering monopoly regulation with a participation constraint.
    Keywords: persuasion, delegation, regulation
    JEL: D82 D83 L43
    Date: 2018–04–07
  2. By: José-Antonio Espín-Sánchez (Cowles Foundation, Yale University); Álvaro Parra (Sauder School of Business)
    Abstract: We study market entry decisions when firms have private information about their profitability. We generalize current models by allowing general forms of market competition and heterogeneous firms that self-select when entering the market. Post-entry profits depend on market structure, and on the identities and the private information of the entering firms. We introduce a notion of the firm's strength and show that an equilibrium where players' strategies are ranked by strength, or herculean equilibrium, always exists. Moreover, when profits are elastic enough with respect to the firm's private information, the herculean equilibrium is the unique equilibrium of the game.
    Keywords: Entry, Oligopolistic markets, Private Information
    Date: 2018–04
  3. By: Zvika Neemam (Tel Aviv University); Aniko Ory (Cowles Foundation, Yale University); Jungju Yu (Yale School of Management)
    Abstract: We study a model of reputation with two long-lived ?rms that sell their products under a collective brand or under two di?erent individual brands. Firms face a moral hazard problem because their quality investments are not observed. Investments can only be sustained due to reputational concerns. In a collective brand, consumers cannot distinguish between the two ?rms. We show that in the long run, this makes it harder to establish a good reputation because of the incentives to free-ride on the other ?rm’s investments. But in the short run it mitigates the temptation to milk good reputation. Consequently, a collective brand can provide stronger incentives to invest in quality if ?rms are su?iciently impatient. We explain the connection between incentives and the type of industry in which the ?rms operate as captured by the underlying signal structure and consumers’ prior beliefs. We discuss the relation to country-of-origin labelling, agricultural cooperatives, and other collective brands.
    Keywords: Branding, Collective reputation, Commitment, Country of origin
    JEL: C70 D21 D40 D70 L10 L50
    Date: 2016–12
  4. By: Chatterjee, Rittwik; Chattopadhyay, Srobonti; Kabiraj, Tarun
    Abstract: Spillovers of R&D outcome affect the R&D decision of a firm. The present paper discusses the R&D incentives of a firm when the extent of R&D spillover is private information to each firm. We construct a two stage game involving two firms when the firms first decide simultaneously whether to invest in R&D or not, then they compete in quantity. Assuming general distribution function of firm types we compare R&D incentives of firms under alternative scenarios based on different informational structures. The paper shows that while R&D spillovers reduce R&D incentives under complete information unambiguously, however, it can be larger under incomplete information.
    Keywords: R&D incentives, Cournot duopoly, Spillovers, Incomplete information
    JEL: D43 D82 L13 O31
    Date: 2018–03–09
  5. By: Joan-Maria Esteban; Sabine Flamand; Massimo Morelli; Dominic Rohner
    Abstract: This paper analizes the repeated interaction between groups in a country as a repeated Stackelberg game, where conflict and secession can occur on the equilibrium path owing to commitment problems. If a group out of power is small enough and its contribution to total surplus not too large, then the group in power can always maintain peace with an acceptable offer of surplus sharing for every period. When there is a mismatch between the relative size and the relative surplus contribution of the minority group, conflict can occur. While in the static model secession can occur only as a peaceful outcome, in the infinite horizon game with high discount factor secession may result following costly conflict. We discuss our full characterization of equilibrium outcomes in the light of the available empirical evidence.
    Keywords: secessions, conflict, repeated Stackelberg game
    JEL: C7 D74
    Date: 2018–03
  6. By: Ludivine Roussey; Raphaël Soubeyran
    Abstract: We develop a double-sided moral hazard model in which the production of justice depends on two tasks (jurisdictional and administrative). The jurisdictional task can be provided only by a judge (the agent) while the administrative task can be provided either by the government (the principal) and/or by the judge. However, the judge performs the administrative task at a higher unit cost. First, we show that the rst-best situation is such that the judge exerts no effort to provide the administrative task. Second, we show that two forms of (second-best) optimal contract can emerge when neither the government's effort nor the judge's effort is contractible: either the incentives are shared between the government and the judge and the judge exerts no effort to provide the administrative task, or the judge faces high-powered incentives which induce her to exert effort to provide both tasks. Our model proposes a rationale for judges work overload observed in many countries.
    Date: 2018–02
  7. By: Prüfer, Jens (Tilburg University, Center For Economic Research); Dengler, Sebastian (Tilburg University, Center For Economic Research)
    Abstract: Recent progress in information technologies provides sellers with detailed knowledge about consumers' preferences, approaching perfect price discrimination in the limit. We construct a model where consumers with less strategic sophistication than the seller's pricing algorithm face a trade-off when buying. They choose between a direct, transaction cost-free sales channel and a privacy-protecting, but costly, anonymous channel. We show that the anonymous channel is used even in the absence of an explicit taste for privacy if consumers are not too strategically sophisticated. This provides a micro-foundation for consumers' privacy choices. Some consumers benefit but others suffer from their anonymization.
    Keywords: privacy; big data; perfect price discrimination; level-k thinking
    JEL: L11 D11 D83 D01 L86
    Date: 2018
  8. By: Ngo Van Long; Martin Richardson; Frank Stähler
    Abstract: We construct a Hotelling-type model of two media providers, each of whom can issue fake and/or real news and each of whom can invest in the debunking of their rival’s fake news. The model assumes that consumers have an innate preference for one provider or the other and value real news. However, that valuation varies according to their bias favoring one provider or the other. We demonstrate a unique subgame perfect Nash equilibrium in which only one firm issues fake news and we show, in this setting, that increased polarization of consumers - represented by a wider distribution - increases the prevalence of both fake news and debunking expenditures and is welfare reducing. We also show, inter alia, that a stronger preference by consumers for their preferred provider lowers both fake news and debunking. Finally, we compare monopoly and duopoly market structures in terms of “fake news” provision and show that a public news provider can be welfare improving.
    Keywords: fake news, media, debunking
    JEL: D21 L15 L82
    Date: 2018
  9. By: Maarten Janssen; Sandro Shelegia
    Abstract: This paper studies vertical relations in a search market. As the wholesale arrangement between a manufacturer and its retailers is typically unobserved by consumers, their beliefs about who is to be blamed for a price deviation play a crucial role in determining wholesale and retail prices. The common assumption in the consumer search literature is that consumers exclusively blame an individual retailer for a price deviation. We show that in the vertical relations context, predictions based on this assumption are not robust in the sense that if consumers assign just a small probability to the event that the upstream manufacturer is responsible for the deviation, equilibrium predictions are qualitatively different. For the robust beliefs, the vertical model can explain a variety of observations, such as retail price rigidity (or, alternatively, low cost pass-through), non-monotonicity of retail prices in search costs, and (seemingly) collusive retail behavior. The model can be used to study a monopoly online platform that sells access to final consumers.
    Keywords: vertical relations, consumer search, Double Marginalization, product differentiation, price rigidities
    JEL: D40 D83 L13
    Date: 2018–03
  10. By: Karl Schlag (University of Vienna); Andriy Zapechelnyuk (University of St Andrews)
    Abstract: A searcher explores alternatives sequentially and is unaware of the distribution of values of unexplored alternatives. We are interested in decision rules that perform close to Bayesian optimal ones under any prior, at each point of time, and after each history of observations. We call such rules dynamically robust. Standard rules used in the search literature are based on cutoff strategies and are not dynamically robust. We uncover general principles that make this rich setting tractable. We derive a dynamically robust decision rule, which involves randomized behavior and can be approximated by a rule with a linear stopping probability.
    Keywords: Sequential search, search without priors, robust control, competitive ratio, dynamic consistency
    JEL: D83 D81 C44
    Date: 2017–12–04
  11. By: Landeo, Claudia (University of Alberta, Department of Economics); Spier, Kathryn (Harvard Law School)
    Abstract: This paper studies the design of enforcement policies to detect and deter harmful short-term activities committed by groups of injurers. With an ordered-leniency policy, the degree of leniency granted to an injurer who self reports depends on his or her position in the self-reporting queue. By creating a "race to the courthouse," ordered-leniency policies lead to faster detection and stronger deterrence of illegal activities. The socially optimal level of deterrence can be obtained at zero cost when the externalities associated with the harmful activities are not too high. Without leniency for self reporting, the enforcement cost is strictly positive and there is underdeterrence of harmful activities relative to the first-best level. Hence, ordered-leniency policies are welfare improving. Our findings for environments with groups of injurers complement Kaplow and Shavell's (1994) results for single-injurer environments. Experimental evidence provides support for our theory.
    Keywords: Law Enforcement; Leniency; Self-Reporting; Ordered Leniency; Harmful Externalities; White-Collar Crime; Securities Fraud; Insider Trading; Market Manipulation; Whistle-blowers; Non-Cooperative Games; Prisoners Dilemma; Coordination Games; Risk Dominance; Pareto Dominance; Experiments
    JEL: C72 C90 D86 K10 L23
    Date: 2018–04–11
  12. By: Bourreau, Marc; Jullien, Bruno; Lefouili, Yassine
    Abstract: This paper investigates the impact of horizontal mergers on firms' incentives to invest in demand-enhancing innovation. In our baseline model, we identify three key effects of a merger on the merging firms' incentives to innovate: the margin expansion effect, the demand expansion effect, and the innovation diversion effect. The first effect is negative, while the second is positive and the third can be either positive or negative depending on the nature of the innovation. We show that the overall impact of a merger on innovation can be either positive or negative and provide sufficient conditions and specific models under which each of these two scenarios arises. Finally, we extend our model to incorporate spillovers and synergies in R&D.
    Keywords: Horizontal Mergers; Innovation; Competition
    JEL: D43 L13 L40
    Date: 2018–03
  13. By: Christian Catalini; Joshua S. Gans
    Abstract: This paper explores how entrepreneurs can use initial coin offerings — whereby they issue crypto tokens and commit to accept only those tokens as payment for future use of a digital platform — to fund venture start-up costs. We show that the ICO mechanism allows entrepreneurs to generate buyer competition for the token, which, in turn, reveals consumer value without the entrepreneurs having to know, ex ante, consumer willingness to pay. We find that venture returns are independent of any committed growth in the supply of tokens over time, but that initial funds raised are maximized by setting that growth to zero to encourage saving by early participants. Furthermore, by revealing key aspects of consumer demand, crypto tokens may increase entrepreneurial returns beyond what can be achieved through traditional equity financing. A lack of commitment in monetary policy can, however, undermine saving and, thus, the cost of using tokens to fund start-up costs is potential inflexibility in future capital raising. Crypto tokens can also facilitate coordination among stakeholders within digital ecosystems when network effects are present.
    JEL: E42 L12 L26
    Date: 2018–03
  14. By: Mukand, Sharun W. (University of Warwick); Rodrik, Dani (Harvard University)
    Abstract: We develop a conceptual framework to highlight the role of ideas as a catalyst for policy and institutional change. We make an explicit distinction between ideas and vested interests and show how they feed into each other. In doing so the paper integrates the Keynes-Hayek perspective on the importance of ideas with the currently more fashionable Stigler-Becker (interests only) approach to political economy. We distinguish between two kinds of ideational politics { the battle among different worldviews on the efficacy of policy (worldview politics) versus the politics of victimhood, pride and identity (identity politics). Political entrepreneurs discover identity and policy `memes' (narratives, cues, framing) that shift beliefs about how the world works or a person's belief of who he is (i.e. identity). Our framework identifies a complementarity between worldview politics and identity politics and illustrates how they may reinforce each other. In particular, an increase in identity polarization may be associated with a shift in views about how the world works. Furthermore, an increase in income inequality is likely to result in a greater incidence of ideational politics. Finally, we show how ideas may not just constrain, but also `bite' the interests that helped propagate them in the rst instance.
    Date: 2018
  15. By: Klumpp, Tilman (University of Alberta, Department of Economics); Su, Xuejuan (University of Alberta, Department of Economics)
    Abstract: We examine competition between a private and a public provider in markets for "merit goods" such as education, healthcare, housing, recreation, or culture. The private firm provides a high-price/high-quality variety of the good and serves richer individuals, while the public firm provides a low-price/low-quality variety and serves poorer individuals. We first characterize the private competitor's best response to changes in the public firm's price and quality. This enables us to examine the distributional effects of government policies aimed at enhancing access to publicly provided goods, and of changes to the government's budget constraint that make publicly provided goods more expensive or decrease their quality. We then derive the government's optimal provision policy, taking the private response into consideration. Our results have implications for the financing of publicly provided goods, and for whether additional resources, if available, should be spent on reducing the price or enhancing the quality of these goods.
    Keywords: Mixed duopoly; quality differentiation; public provision of private goods; crowding-out/in; funding of public services; distribution
    JEL: D21 D43 H11 H42 H44 I00 L38
    Date: 2018–04–03
  16. By: Jong-Hee Hahn (School of Economics, Yonsei University); Chan KIm (School of Economics, Yonsei University)
    Abstract: This paper examines the welfare effects of third-degree price discrimination by an input monopolist when downstream producers compete with differentiated goods and consumers have heterogeneous preferences for the products. The input monopolist's optimal pricing follows the standard inverse-elasticity rule, but its implication for welfare differs from the traditional analysis with homogeneous goods. Price discrimination can improve welfare even without an increase in total output or opening of new market. Also, the effect of price discrimination on consumer surplus differs from the one obtained for the case of price discrimination in final-goods markets. Our results shed new light on public policy regarding input price discrimination. We can no longer claim that price discrimination is harmful to society because it does not increase or reduces total output. Moreover, different policy responses are required depending on welfare standard. Simple policy guidelines are proposed that can be used in actual antitrust cases.
    Keywords: third-degree price discrimination, intermediate goods market, product differentiation, competition policy, antitrust JEL Classification: L11
    Date: 2018–04
  17. By: Elliott, Matt; Nava, Francesco
    Abstract: This paper studies market clearing in matching markets. The model is non-cooperative, fully decentralized, and in Markov strategies. Workers and firms bargain with each other to determine who will be matched to whom and at what terms of trade. Once a worker firm pair reach agreement they exit the market. Alternative possible matches affect agents' bargaining positions. We ask when do such markets clear efficiently and find that inefficiencies { mismatch and delay { often feature. Mismatch occurs whenever an agent's bargaining position is at risk of deteriorating. Delay occurs whenever agents expect their bargaining position to improve. Delay can be extensive and structured with vertically differentiated markets endogenously clearing from the top down.
    JEL: J1
    Date: 2018–02–08

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