nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒06‒11
nineteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Revenue Guarantee Equivalence By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  2. Price-cost tests and loyalty discounts By Calzolari, Giacomo; Denicolò, Vincenzo
  3. Persuasion Against Self-Control Problems By von Wangenheim, Jonas
  4. "A Cognitive Foundation for Social Image Concerns" By Yosuke Hashidate
  5. Sweet Lemons: Mitigating Collusion in Organizations By Pollrich, Martin; von Negenborn, Colin
  6. Identification of efficient equilibria in multiproduct trading with indivisibilities and non-monotonicity By Iván Arribas; Amparo Urbano
  7. On Supply Function Equilibria in a Mixed Duopoly By Carlos, Gutiérrez-Hita; Vicente-Pérez, José
  8. Competition over Cursed Consumers By Alessandro Ispano; Peter Schwardmann
  9. Intimidation: Linking Negotiation and Conflict By Sambuddha Ghosh; Gabriele Gratton; Caixia Shen
  10. An Aggregative Games Approach to Merger Analysis in Multiproduct-Firm Oligopoly By Nocke, Volker; Schutz, Nicolas
  11. Sequential Majoritarian Blotto Games By Klumpp, Tilman; Konrad, Kai
  12. All-Pay Oligopolies: Price Competition with Unobservable Inventory Choices By Joao Montez; Nicolas Schutz
  13. Explaining Escalating Fines and Prices: The Curse of Positive Selection By Buehler, Stefan; Nicolas Eschenbaum
  14. Nonlinear Incentives and Advisor Bias By Inderst, Roman
  15. Prudence and preference for flexibility gain By Daniel Danau
  16. Stability and Universal Implementability of the Price Mechanism By Kohzo Shiraishi; Ken Urai; Hiromi Murakami
  17. Tort Liability and Unawareness By Surajeet Chakravarty; David Kelsey; Joshua C. Teitelbaum
  18. Consumer Search with and without Tracking By Marcel Preuss
  19. Constrained public goods in networks By Nizar Allouch; Maia King

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, University of Chicago); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: We revisit the revenue comparison of standard auction formats, including first-price, second-price, and English auctions. We rank auctions according to their revenue guarantees, i.e., the greatest lower bound of revenue across all informational environments, where we hold fixed the distribution of bidders' values. We conclude that if we restrict attention to the symmetric affiliated models of Milgrom and Weber (1982) and monotonic pure-strategy equilibria, first-price, second-price, and English auctions all have the same revenue guarantee, which is equal to that of the first-price auction as characterized by Bergemann, Brooks, and Morris (2017a). If we consider all equilibria or if we allow more general models of information, then first-price auctions have a greater revenue guarantee than all other auctions considered.
    Keywords: Revenue guarantee, Common values, Affiliated values, Revenue equivalence, Revenue ranking, First-price auction, Second-price auction, English auction
    JEL: C72 D44 D82 D83
    Date: 2018–05
  2. By: Calzolari, Giacomo; Denicolò, Vincenzo
    Abstract: We analyze, by means of a formal economic model, the use of price-cost tests to assess the competitive effects of loyalty discounts. In the model, a dominant firm enjoys a competitive advantage over its rivals and uses loyalty discounts as a means to boost the demand for its product. We show that in this framework price-cost tests are misleading or, at best, completely uninformative. Our results cast doubts on the applicability of price-tests to loyalty discount cases.
    Keywords: Loyalty discounts; As-efficient competitor; Price-cost tests; Sacrifice of profit; Contestable share.
    JEL: D42 D82 L42
    Date: 2018–05
  3. By: von Wangenheim, Jonas (Humboldt University Berlin)
    Abstract: I derive a social planner\'s optimal information design in an environment with quasi-hyperbolic discounting consumers without commitment. Consumption induces instantaneous utility, but unknown delayed cost. Consumers may or may not acquire additional costless information on the cost parameter. The planner\'s optimal signal can be interpreted as an incentive compatible consumption recommendation whenever the cost parameter is below some cut-off. Welfare strictly exceeds the one under full information. I characterize distributional conditions under which welfare attains first best.
    Keywords: bayesian persuasion; present bias; hyperbolic discounting; rational inattention;
    JEL: D01 D18 D62 D82
    Date: 2018–05–29
  4. By: Yosuke Hashidate (CIRJE, Faculty of Economics, The University of Tokyo)
    Abstract: This paper provides a cognitive foundation for social image concerns by studying preferences over menus; that is, this paper studies the social-image formation in the decision-making process. This framework has a two-stage decision problem. At the first stage, the decision maker chooses a menu; at the second stage, she chooses an option from the chosen menu at the first stage. In social image theory, the decision maker cares about how her choice behaviors are perceived by other agents. We do anticipate such emotions at the second stage and we, therefore, study plausible axioms at the first stage. However, the decision maker may feel the emotions even in the first stage. By capturing such a trade-off as an endogenous reference-point formation, this paper builds an axiomatic model, in which the trade-offs in the first stage determine social image concerns; that is, the factors behind social image concerns depend on endogenous reference points. This paper explores both the anticipation of image concerns and the formation of image concerns. This paper uniquely identifies the building blocks of the model. Moreover, this paper studies menu effects in terms of pride-seeking preferences, shame-averse preferences, and temptation-driven preferences, which can lead to violations of Weak Axiom of Revealed Preference (WARP).
    Date: 2018–04
  5. By: Pollrich, Martin (University of Bonn); von Negenborn, Colin (HU Berlin)
    Abstract: This paper shows that the possibility of collusion between an agent and a supervisor imposes no restrictions on the set of implementable social choice functions (SCF) and associated payoff vectors. Any SCF and any payoff profile that are implementable if the supervisor′s information was public is also implementable when this information is private and collusion is possible. To implement a given SCF we propose a one-sided mechanism that endogenously creates private information for the supervisor vis-à-vis the agent, and conditions both players′ payoffs on this endogenous information. We show that in such a mechanism all collusive side-bargaining fails, similar to the trade failure in Akerlof′s (1970) car market and in models of bilateral trade.
    Keywords: mechanism design; collusion; asymmetric information; correlation;
    JEL: D82 D83 L51
    Date: 2018–06–07
  6. By: Iván Arribas (ERI-CES, IVIE, University of Valencia); Amparo Urbano (ERI-CES, University of Valencia)
    Abstract: This paper focuses on multiproduct trading with indivisibilities and where a representative agent may have non-monotonic preferences. In this framework, the set of firms' profits (which comes from efficient subgame perfect Nash equilibria) is the Pareto frontier of some projection of the core of the game. We show that under monotonicity efficient subgame perfect Nash equilibria are achieved by single offers and the equilibrium characterization is easy to obtain. When dealing with non-monotonic preferences the problem becomes more challenging. Then, we define a pair of primal-dual linear programming problems that fully identifies the core of the game. A set of modified versions of the dual programming problem characterizes the Pareto-optimal frontier of the core projection on firms' coordinates. Although this approach gives us the payoff-equivalence class (Strong Nash equilibria) of all the efficient subgame perfect Nash equilibria, the number of problems to be solved may be huge.
    Keywords: Multiproduct trading, Package assignment problem, Subgame perfect Nash equilibrium, Strong Nash equilibrium
    JEL: C72 D43 L13
    Date: 2018–05
  7. By: Carlos, Gutiérrez-Hita (Departamento de Estudios Económicos y Financieros); Vicente-Pérez, José (Departamento Fundamentos Análisis Económico)
    Abstract: In this paper we present a mixed duopoly model of supply function competition under uncertainty with product differentiation. We find that, regardless the nature of product heterogeneity, the best response of the private firm always arises as strategic complement. Contrary to this, state-owned firm's best response arises either as strategic complement or substitute depending on the product heterogeneity. As a result of the ex post realization of the demand uncertainty, different equilibria are reached.
    Keywords: Supply Function Equilibria; Mixed oligopoly; Differentiated products
    JEL: D43 H42 L13
    Date: 2018–05–28
  8. By: Alessandro Ispano; Peter Schwardmann
    Abstract: We model firms’ quality disclosure and pricing in the presence of cursed consumers, who fail to be sufficiently skeptical about undisclosed quality. We show that neither competition nor the presence of sophisticated consumers necessarily protect cursed consumers from being exploited. Exploitation arises if markets are vertically differentiated, if there are few cursed consumers, and if average product quality is high. Three common policy measures aimed at consumer protection, i.e. mandatory disclosure, third party disclosure and consumer education may all increase exploitation and decrease welfare. Even where these policies improve overall welfare, they often lead to a reduction in consumer surplus.
    Keywords: naïve, cursed, disclosure, consumer protection, labeling, competition
    JEL: C72 D03 D82 D83
    Date: 2018
  9. By: Sambuddha Ghosh (Department of Economics, Boston university); Gabriele Gratton (School of Economics, UNSW Business School, UNSW); Caixia Shen (School of International Business Administration, Shanghai University of Finance and Economics)
    Abstract: A challenger wants a resource initially held by a defender, who can negotiate a settlement by offering to share the resource. If challenger rejects, conflict ensues. During conflict each player could be a tough type for whom fighting is costless. Therefore non-concession intimidates the opponent into conceding. Unlike in models where negotiations happen in the shadow of exogenously specified conflicts, the rejected offer determines how conflict is played if negotiations fail. In turn, how players are expected to play during conflict determines their negotiating positions. In equilibrium, negotiations always fail with positive probability, even if players face a high cost of conflict. Allowing multiple offers leads to brinkmanship—the only acceptable offer is the one made when conflict is imminent. If negotiations fail, conflict is prolonged and non-duration dependent.
    Keywords: Intimidation, reputation, terrorism, negotiation, brinkmanship, costly war-of-attrition
    JEL: D74 D82
    Date: 2018–04
  10. By: Nocke, Volker; Schutz, Nicolas
    Abstract: Using an aggregative games approach, we analyze horizontal mergers in a model of multiproduct-firm price competition with nested CES or nested logit demands. We show that the Herfindahl index provides an adequate measure of the welfare distortions introduced by market power, and that the induced change in the naively-computed Herfindahl index is a good approximation for the market power effect of a merger. We also provide conditions under which a merger raises consumer surplus, and conditions under which a myopic, consumer-surplus-based merger approval policy is dynamically optimal. Finally, we study the aggregate surplus and external effects of a merger.
    Keywords: Aggregative Game; Herfindahl index; Horizontal Merger; market power; Multiproduct Firms; Oligopoly Pricing
    JEL: L13 L40
    Date: 2018–05
  11. By: Klumpp, Tilman (University of Alberta, Department of Economics); Konrad, Kai (Max Planck Institute)
    Abstract: We study Colonel Blotto games with sequential battles and a majoritarian objective. For a large class of contest success functions, the equilibrium is unique and characterized by an even split: Each battle that is reached before one of the players wins a majority of battles is allocated the same amount of resources from the player's overall budget. As a consequence, a player's chance of winning any particular battle is independent of the battle field and of the number of victories and losses the player accumulated in prior battles. This result is in stark contrast to equilibrium behavior in sequential contests that do not involve either fixed budgets or a majoritarian objective. We also consider the equilibrium choice of an overall budget. For many contest success functions, if the sequence of battles is long enough the payoff structure in this extended games resembles an all-pay auction without noise.
    Keywords: Blotto games; dynamic battles; multi-battle contest; all-pay auctions; sequential elections
    JEL: D72 D74
    Date: 2018–05–29
  12. By: Joao Montez; Nicolas Schutz
    Abstract: We study a class of games where stores source unobservable inventories in advance, and then simultaneously set prices. Our framework allows for firm asymmetries, heterogeneous consumer tastes, endogenous consumer information through advertising, and salvage values for unsold units. The payoff structure relates to a complete-information all-pay contest with outside options, non-monotonic winning and losing functions, and conditional investments. In the generically unique equilibrium, stores randomize their price choice and, conditional on that choice, serve all their targeted demand—thus, some inventories may remain unsold. As inventory costs become fully recoverable, the equilibrium price distribution converges to an equilibrium of the associated Bertrand game (where firms first choose prices and then produce to order). This suggests that with production in advance, the choice between a Cournot analysis and a Bertrand-type analysis, as properly generalized in this paper, should depend on whether or not stores observe rivals’ inventories before setting prices.
    Keywords: Oligopoly, inventories, production in advance, all-pay contests, Bertrand convergence
    JEL: L13 D43
    Date: 2018–05
  13. By: Buehler, Stefan; Nicolas Eschenbaum
    Abstract: This paper shows that escalating fines emerge in a generalized version of the canonical Becker (1968) model if the authority (i) does not fully credit offender gains to social welfare, and (ii) lacks commitment ability. We demonstrate that the authority has no incentive to increase the fine for repeat offenders because of their positive selection. Instead, escalation is driven by the authority's incentive to reduce the fine for low-value offenders in the future and redistribute additional offender gains to society. Our analysis nests optimal law enforcement with uncertain detection and behavior-based monopoly pricing with imperfect customer recognition.
    Keywords: Escalation, repeat offenders, behavior-based pricing, deterrence
    JEL: D42 L11 L12
    Date: 2018–06
  14. By: Inderst, Roman
    Abstract: We analyze firms'' competition to steer an advisor's recommendations through potentially non-linear incentives. Even when firms are symmetric, so that the overall size of compensation would not distort advice when incentives were linear, advice is biased when firms are allowed to make compensation non-linear, which they optimally do. Policies that target an advisor's liability are largely ineffective, as firms react to such increased liability by making incentives even steeper, increasing bonus payments while reducing the linear (commission) part at the same time. This observation may justify policymakers' direct interference with firms' compensation practice, as frequently observed notably in consumer finance.
    Date: 2018–05
  15. By: Daniel Danau (Normandie Univ, UNICAEN, CNRS, CREM, F-14000 Caen, France)
    Abstract: We investigate the properties of the preference of an individual for an unknown pro t π(x) over a certain pro t π(E(x)), where x is unknown at the time when the decision is made, whereas its expected value E(x) is known. The additional bene t to the individual of the former over the latter consists in a flexibility gain. For instance, a flexibility gain arises in investment decisions when the individual obtains a higher bene t if she postpones the investment until after some technology x is realized, rather than making it today with technology E(x). We show that prudence (positive third derivative of the utility function) is related to the size of the flexibility gain, in the same vein as it is related to the utility premium of an individual who prefers a certain pro t π to a variable pro t π + Ɛ͂, where E(Ɛ͂) = 0. We further examine the way in which the concept of flexibility gain is linked to a variety of notions and problems, namely downside risk aversion, concave surplus of a risk neutral individual, stochastic dominance, optimal prevention, and principal-agent relationships with unknown distribution of some relevant variable. This permits to highlight the role of the degree of absolute prudence (or of the third derivative of the surplus function, when the individual is risk neutral) in decision making.
    Keywords: Prudence; Flexibility gain; Utility premium; Downside risk aversion
    JEL: D81
    Date: 2018–05
  16. By: Kohzo Shiraishi (Faculty of Economics, Kobegakuin University); Ken Urai (Graduate School of Economics, Osaka University); Hiromi Murakami (School of Business Administration, Kwansei Gakuin University)
    Abstract: An axiomatic characterization of price or market mechanisms is one of the most important problems in general equilibrium theory. Based on the general equilibrium framework and the characterization of the price mechanism, this paper provides a new perspective or a uni ed viewpoint on some axioms in social choice theory and a setting for the informational efficiency problem of the allocation mechanisms. Our arguments focus on a contemporary reconsideration and generalization of the category theoretic method in Sonnenschein (1974) and the replica stability arguments in social choice theory like Thom- son (1988) and Nagahisa (1994). Sonnenschein's axiomatic characterization of the price mechanism is extended to an economy-dependent welfare form of a universal implementability theorem. The frame- work provides new methods and general settings in treating mechanisms with messages or information, and many social choice axioms. Our result also has an important economic interpretation that the price mechanism can be characterized as a universal rule that is stable in assuring sufficiently high utility levels for each member of a small economy relative to its large expansions.
    Keywords: Price Mechanism, Axiomatic Characterization, Category Theory, Informational Effi- ciency, Universal Implementability, Message Mechanism
    JEL: C60 D50 D71
    Date: 2018–05
  17. By: Surajeet Chakravarty (Department of Economics, University of Exeter); David Kelsey (Department of Economics, University of Exeter); Joshua C. Teitelbaum (Georgetown University)
    Abstract: Unawareness is a form of bounded rationality where a person fails to conceive all feasible acts or consequences or to perceive as feasible all conceivable act-consequence links. We study the implications of unawareness for tort law, where relevant examples include the discovery of a new product or technology (new act), of a new disease or injury (new consequence), or that a product can cause an injury (new link). We argue that negligence has an important advantage over strict liability in a world with unawareness–negligence, through the stipulation of due care standards, spreads awareness about the updated probability of harm.
    Keywords: negligence, strict liability, tort law, unawareness.
    JEL: D83 K13
    Date: 2018
  18. By: Marcel Preuss
    Abstract: In this paper, I develop a tractable framework with sequential consumer search to address the effect of tracking on market outcomes. Tracking search histories is informative about consumers’ valuations because different consumer types have different stopping probabilities. With tracking, the unique equilibrium price path is increasing whereas without tracking, an average uniform price prevails. Welfare effects largely depend on how tracking affects consumers’ search persistence. For intermediate search costs, tracking based price discrimination exacerbates the holdup problem and leads to inefficiently low search persistence. For high search costs instead, tracking prevents a market breakdown as low prices conditional on short search histories secure consumers a positive surplus from search. Tracking prevails endogenously when consumers can dynamically opt out from tracking. This holds since disclosing their search history is always individually rational for consumers, irrespective of the overall effect on consumer surplus.
    Keywords: consumer search, privacy, dynamic price discrimination
    JEL: D11 D18 D83 L13 L86
    Date: 2018–05
  19. By: Nizar Allouch; Maia King
    Abstract: This paper analyses the private provision of public goods where agents interact within a fixed network structure and may benefit only from their direct neighbours’ provisions. We survey the literature and then generalise the public goods in networks model of Bramoulle and Kranton (2007) to allow for constrained provision. In so doing, we show that, using the concept of k-insulated set, any network supports a Nash equilibrium with no intermediate contributors.
    Keywords: public goods; Nash equilibrium; k-insulated set; networks
    JEL: D85 H41
    Date: 2018–05

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