nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒12‒10
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Information Nudges and Self Control By Mariotti, Thomas; Schweizer, Nikolaus; Szech, Nora; von Wangenheim, Jonas
  2. Countering the Winner's Curse: Optimal Auction Design in a Common Value Model By Bergemann, Dirk; Brooks, Benjamin A; Morris, Stephen
  3. Unanimity and Local Incentive Compatibility By Miho Hong; Semin Kim
  4. On Incentive Compatible, Individually Rational Public Good Provision Mechanisms By Kunimoto, Takashi; Zhang, Cuiling
  5. On the Values of Bayesian Cooperative Games with Sidepayments By Salamanca, Andrés
  6. Stable Constitutions By Daeyoung Jeong; Semin Kim
  7. A Generalization of the Harsanyi NTU Value to Games with Incomplete Information By Salamanca, Andrés
  8. Multiproduct Mergers and Quality Competition By Johnson, Justin Pappas; Rhodes, Andrew
  9. The Fate of Inventions. What can we learn from Bayesian learning in strategic options model of adoption ? By Edouard Civel; Marc Baudry
  10. Product Innovation of an Incumbent Firm : A Dynamic Analysis By Hagspiel, V.; Huisman, Kuno; Kort, Peter; Nunes, Claudia; Pimentel, Rita
  11. A theory of esteem based peer pressure By Fabrizio Adriani; Silvia Sonderegger
  12. A Prisoners' Dilemma with Incomplete Information on the Discount Factors By Elena M. Parilina; Alessandro Tampieri
  13. Contests with Ex-Ante Target Setting By Robertson, Matthew J.
  14. M&A Advisory and the Merger Review Process By Michele Bisceglia; Salvatore Piccolo; Emanuele Tarantino
  15. On bundling and entry deterrence By Andrea Greppi; Domenico Menicucci
  16. Heterogeneous Consumer Expectations and Monopoly Pricing for Durables with Network Externalities By Hattori, Keisuke; Zennyo, Yusuke
  17. Attention Please! By Olivier Gossner; Jakub Steiner; Colin Stewart

  1. By: Mariotti, Thomas; Schweizer, Nikolaus; Szech, Nora; von Wangenheim, Jonas
    Abstract: A present-biased consumer has to make sequential consumption decisions under no commitment. Consumption is enjoyable in the short term but potentially harmful in the long term. The likelihood of harmful future consequences hinges on the consumer's type. While the distribution of types is common knowledge, the consumer's individual type is initially unknown. We study information design in this setting, varying how much a consumer learns about his type via an information nudge. We first consider a mechanism designer who is benevolent in the sense that his interests are aligned with the consumer's. We find that there always exists an optimal incentive-compatible persuasion mechanism that is of cutoff type, either recommending consumption or abstinence, and we provide a full characterization of this information nudge for an arbitrary distribution of types. Under a stronger bias for the present, the target group of the nudge who receives a credible signal to abstain must be tightened. We compare this information nudge with the optimal information structure if expected consumption should be minimized, and if it should be maximized. The first may be the goal of a health authority, whereas the latter may be preferred by a lobbyist.
    Keywords: Information Design; Information Nudge; Present-Biased Preferences; SelfControl
    JEL: C73 D82
    Date: 2018–04
  2. By: Bergemann, Dirk; Brooks, Benjamin A; Morris, Stephen
    Abstract: We characterize revenue maximizing mechanisms in a common value environment where the value of the object is equal to the highest of bidders' independent signals. The optimal mechanism exhibits either neutral selection, wherein the object is randomly allocated at a price that all bidders are willing to pay, or advantageous selection, wherein the object is allocated with higher probability to bidders with lower signals. If neutral selection is optimal, then the object is sold with probability one by a deterministic posted price. If advantageous selection is optimal, the object is sold with probability less than one at a random price. By contrast, standard auctions that allocate to the bidder with the highest signal (e.g., the first-price, second-price or English auctions) deliver lower revenue because of the adverse selection generated by the allocation rule: if a bidder wins the good, then he revises his expectation of its value downward. We further show that the posted price mechanism is optimal among those mechanisms that always allocate the good. A sufficient condition for the posted price to be optimal among all mechanisms is that there is at least one potential bidder who is omitted from the auction. Our qualitative results extend to more general common value environments where adverse selection is high.
    Keywords: advantageous selection; Adverse Selection; common values; maximum game; neutral selection; Optimal auction; posted price; revenue equivalence
    JEL: C72 D44 D82 D83
    Date: 2018–11
  3. By: Miho Hong (Yonsei University); Semin Kim (Yonsei University)
    Abstract: We study the relationship between unanimity and local incentive constraints of deterministic social choice functions (or voting mechanisms) . We consider a standard Bayesian environment where agents have private and strict preference orderings on a finite set of alternatives. We show that with independent and generic priors, locally ordinal Bayesian incentive compatibility of a social choice function combined with unanimity implies the tops-only property. Also, assuming unanimity invokes the sufficiency of local incentive constraints for full incentive constraints. Furthermore, unanimity helps our results hold in a broad class of domains | a few of its constituents being the unrestricted domain, the single-peaked domain, the single-dipped domain and some other connected domains.
    Keywords: Unanimity, Incentive compatibility, Local incentive compatibility, Tops-only property, Connected domains
    JEL: C72 D01 D02 D72 D82
    Date: 2018–11
  4. By: Kunimoto, Takashi (School of Economics, Singapore Management University); Zhang, Cuiling (School of Economics, Singapore Management University)
    Abstract: This paper characterizes mechanisms satisfying Bayesian incentive compatibility (BIC) and interim individual rationality (IIR) in the classical public good provision problem. Many papers in the literature obtain the results in the so-called standard model of ex ante identical agents with a continuous, closed interval of types. Although the standard model and more generally a continuum type space are widely used in the literature, it is nonetheless an abstraction of reality. Given that the public good provision problem has occupied a central application in the theory of mechanism design, we propose a "stress test" for the results in the standard model by subjecting them to a fi nite discretization over the standard model. The main contribution of this paper is that many of the known results gained within the standard continuum type space also hold when it is replaced by a discrete type space.
    Keywords: Budget balance; decision efficiency; incentive compatibility; individual rationality; mechanisms; public goods
    JEL: C72 D78 D82
    Date: 2018–11–20
  5. By: Salamanca, Andrés (Department of Business and Economics)
    Abstract: In this paper we explore the relationship between several value-like solution concepts for cooperative games with incomplete information and utility transfers in the form of sidepayments. In our model, state-contingent contracts are required to be incentive compatible, and thus utility might not be not fully transferable (as it would be in the complete information case). When we restrict our attention to games with orthogonal coalitions (i.e., which do not involve strategic externalities), our first main result states that Myerson’s [Cooperative games with incomplete information. Int. J. Game Theory. (1984), 13, 69-96] generalization of the Shapley NTU value and Salamanca’s [A generalization of the Harsanyi NTU value to games with incomplete information. (2016), HAL 01579898] extension of the Harsanyi NTU value are interim utility equivalent. If we allow for arbitrary informational and strategic externalities, our second main result establishes that the ex-ante evaluation of Myerson’s solution equals Kalai and Kalai’s [Cooperation in strategic games revisited. Q. J. Econ. (2013) 128, 917-966] cooperative-competitive value in two-player games with verifiable types.
    Keywords: Cooperative games; incomplete information; sidepayments
    JEL: C71 C78 D82
    Date: 2018–11–26
  6. By: Daeyoung Jeong (New York University Abu Dhabi); Semin Kim (Yonsei University)
    Abstract: This study identifies a set of stable constitutions. A constitution is a pair of voting rules (f, F) where f is for the choice of final outcome, and F is for the decision on the change of a voting rule from the given rule f. A constitution is stable if any possible alternative rule does not get enough votes to replace the given rule f under the rule F. We fully characterize the set of interim stable constitutions among anonymous voting rules. We also characterize the properties of the interim stable constitutions among general weighted majority rules.
    Keywords: Weighted majority rules, decision rules, self-stability
    JEL: C72 D02 D72 D82
    Date: 2018–11
  7. By: Salamanca, Andrés (Department of Business and 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 S-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 S-solution in this game, it turns out that it prescribes a more intuitive outcome which takes into account the above mentioned informational externality.
    Keywords: Cooperative games; incomplete information; virtual utility
    JEL: C71 C78 D82
    Date: 2018–11–25
  8. By: Johnson, Justin Pappas; Rhodes, Andrew
    Abstract: We investigate mergers in markets where quality differences between products are central. In our model, firms may sell multiple products, and merging and non-merging firms may reposition their product lines by adding or removing products following a merger. We find that such mergers are materially different from those studied in the existing literature. Mergers without synergies may raise consumer surplus, but only when the pre-merger industry structure satisfies certain observable features. Synergies may lower consumer surplus. Mergers are more readily profitable when an industry exhibits multiple qualities, and mergers between small numbers of firms with small market shares may be profitable. Some nonmerging firms may benefit while others lose following a merger. We also provide a new measure of industry concentration: the Quality-adjusted Herfindahl-Hirschman Index extends the standard Herfindahl-Hirschman Index to markets in which quality differences are central.
    Date: 2018–11
  9. By: Edouard Civel; Marc Baudry
    Abstract: We develop a game where heterogeneous agents have the option of adopting an invention of uncertain quality or postponing their decision to benefit from others' experience through Bayesian learning. Messages produced on the invention nature are noisy, representing the "teething troubles" of innovation. Our model gives microeconomic foundations to the S-shaped innovation diffusion curves, informational externality inducing strategic delay in agents' behavior. Moreover, noise could nip in the bud the diffusion of inventions: numerical simulations underline a bi-modal distribution of steady states for innovation diffusion, stillborn or fully developed, bringing to light a reputational valley of death for inventions.
    Keywords: Innovation diffusion ; Invention adoption ; Information ; Strategic options ; Bayesian learning.
    JEL: O33 L15 D83 C73
    Date: 2018
  10. By: Hagspiel, V. (Tilburg University, Center For Economic Research); Huisman, Kuno (Tilburg University, Center For Economic Research); Kort, Peter (Tilburg University, Center For Economic Research); Nunes, Claudia; Pimentel, Rita
    Abstract: In case of a product innovation firms start producing a new product. While doing so, such a firm should decide what to do with its existing product after the firm has innovated. Essentially it can choose between replacing the established product by the new one, or keep on producing the established product so that it produces two products at the same time. The aim of this paper is to design a theoretical framework to analyze this problem. Due to technological progress the quality of the newest available technology, and thus the quality of the innovative product that can be produced by this technology, increases over time. The implication is that a later innovation enables the firm to produce a better innovative product. So, typically the firm faces the tradeoff between innovating fast, which boosts its profits soon but only by a small amount, or innovating later, which leads to a larger payoff increase. The drawback here is that the firm is stuck with producing the established product for a longer time. We fund that a highly uncertain economic environment makes the firm delay abolishing the old product market. But if the innovative market is more volatile, the firm enters the market sooner, provided it will be active on the old market, at least for some time. Moreover, the smaller the initial demand for the innovative product market, the better the quality of the innovative product needs to be for the product innovation to be optimal.
    Keywords: product innovation; technology adoption; Dynamic Programming
    JEL: C61 D81 O33
    Date: 2018
  11. By: Fabrizio Adriani (University of Leicester); Silvia Sonderegger (School of Economics, University of Nottingham)
    Abstract: Signaling models of esteem have implications for peer pressure. Using Benabou's and Tirole's 'honor-stigma' model, we analyze how the pressure to engage in costly signaling changes with the distribution of peers' attributes. In particular, we provide novel comparative statics on the effects of changes in mean, dispersion, skewness and other features of the distribution of peer quality. First, we provide conditions under which moving an individual to a group with higher mean quality may provide stronger incentives (i.e. a 'keeping up with the Joneses' effect) or may induce discouragement (a 'small fish in a big pond' effect). Second, we show that both right and left truncations of the distribution of peer quality reduce incentives. Third, more dispersed peer distributions provide stronger incentives. Finally, more right skewed peer distributions induce stronger incentives when only a small fraction of the group provide the signal, but reduce motivation when provision is widespread. We also analyze the aggregate effects of each of these distributional changes. Applications include education, redistribution, and conspicuous consumption.
    Keywords: Esteem, Status, Peer pressure, Signaling, Small fish in a big pond, Conspicuous consumption, Distributional comparative statics.
    Date: 2018–12
  12. By: Elena M. Parilina; Alessandro Tampieri
    Abstract: This paper analyses a prisoners'dilemma where players' discount factor is private information. We consider an infinitely repeated game where two states of the world may occur. According to her own discount factor, a player chooses a cooperative behaviour in both states (patient), in none of the states (impatient) or in one state only (mildly patient). The presence of different states of the world affects the strategic role of beliefs. A mildly patient player has an incentive in pretending to be patient, which increases with the competitor's belief that the player is patient. nterestingly, this effect prevents or delays cooperative equilibria to occur when the belief in patience is strong.
    Keywords: Bayesian games; two-phases game; Markov perfect equilibrium
    JEL: C73 D43 L13
    Date: 2018
  13. By: Robertson, Matthew J. (Coventry University)
    Abstract: I study contests in which each player is ranked by a scoring rule based on both her performance and how close this performance is to a private target, set before the contest. Each player’s decision problem is to choose her target when performance is subject to a random component. I analyse the incentive properties of target setting, derive conditions on the primitives such that equilibria exist and characterise the players’ behaviour. I show that target setting generates outcome uncertainty under a large class of conditions. In particular, neither private abilities nor perfectly correlated states are necessary. Target setting, therefore, has important implications in contest design as outcome uncertainty is a salient determinant of consumers’ demand for contests. JEL classification numbers: C70 ; D81 ; D82 ; Z20
    Keywords: contests ; target setting ; competitive balance ; incentives ; incomplete information
    Date: 2018
  14. By: Michele Bisceglia (Università di Bergamo); Salvatore Piccolo (Università di Bergamo and CSEF); Emanuele Tarantino (University of Mannheim, MaCCI and CEPR)
    Abstract: Two firms propose a merger to the antitrust authority. They are uninformed about the efficiencies generated by the merger, but can hire an expert to gather information on their behalf. The authority is also uninformed about the merger's efficiencies, but can run a costly internal investigation to learn them. We analyze the effect of the disclosure of the expert's contract on consumer welfare, and show that consumers are not necessarily better off with disclosure. This negative effect hinges on a free-riding problem between expert and authority in the information acquisition game, and is more relevant in highly competitive industries.
    Keywords: Advice, Competition Policy, Mergers, Advisory Contract, Disclosure.
    JEL: D43 L11 L42 L81
    Date: 2018–11–26
  15. By: Andrea Greppi; Domenico Menicucci
    Abstract: A multiproduct dominant firm faces the threat of entry from another multiproduct firm or from single-product firms. We inquire whether the possibility of bundling by the dominant firm is more effective in deterring entry in one setting or the other. We extend the analysis of a model in Hurkens et al. (2018) to explore how the dominance level affects the comparison. For instance, for intermediate dominance levels an integrated firm is more vulnerable to bundling than separate firms, but bundling is a credible action for the dominant firm more often when it faces separate rivals than an integrated rival.
    Keywords: Competitive Bundling, Entry deterrence.
    JEL: D43 L13 L41
    Date: 2018
  16. By: Hattori, Keisuke; Zennyo, Yusuke
    Abstract: This paper studies the optimal pricing and diffusion of durable goods that exhibit positive network externalities, when consumers are heterogeneous in their expectations about future network sizes. We consider the existence of naive consumers, as well as of sophisticated consumers having fulfilled expectations. We find that the firm charges the sequential-diffusion pricing that makes sophisticated consumers function as early adopters, unless consumers quickly become bored with using the goods and/or unless the firm heavily discounts its future profits. We also compare the profitability of three possible pricing strategies with different commitment powers: fixed, responsive, and pre-announced pricing.
    Keywords: durable goods; network externalities; diffusion process; consumer naivete; dynamic pricing
    JEL: D21 D42 L12 L14
    Date: 2018–04–15
  17. By: Olivier Gossner; Jakub Steiner; Colin Stewart
    Abstract: We study the impact of manipulating the attention of a decision-maker who learns sequentially about a number of items before making a choice. Under natural assumptions on the decision-maker's strategy, forcing attention toward one item increases its likelihood of being chosen.
    Keywords: Sequential sampling, marketing, persuasion, attention allocation
    JEL: D8 D91
    Date: 2018–11–29

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