nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒02‒11
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Organizing Competition for the Market By Iossa, Elisabetta; Rey, Patrick; Waterson, Michael
  2. Persuasion Meets Delegation By Anton Kolotilin; Andriy Zapechelnyuk
  3. Bargaining with Intertemporal Maximin Payoffs By Vincent Martinet; Pedro Gajardo; Michel De Lara
  4. Naive Learning with Uninformed Agents By Abhijit Banerjee; Emily Breza; Arun G. Chandrasekhar; Markus Mobius
  5. Surfing Incognito: Welfare Effects of Anonymous Shopping By Johan N. M. Lagerlöf
  6. Horizontal product differentiation with limited attentive consumers By Saur, Marc P.; Schlatterer, Markus G.; Schmitt, Stefanie Yvonne
  7. Research funding and price negotiation for new drugs By Francesca Barigozzi; Izabela Jelovac
  8. Individually Rational Rules for the Division Problem when the Number of Units to be Allotted is Endogenous By Bergantiños, Gustavo; Massó, Jordi; Neme, Alejandro
  9. Pre-Match Investment Competition with Bounded Transfers By Seungjin Han
  10. Decision-making and Fuzzy Temporal Logic By Jos\'e Cl\'audio do Nascimento
  11. Partial Language Competence By Jeanne Hagenbach; Frédéric Koessler
  12. The relation between degrees of belief and binary beliefs: A general impossibility theorem By Franz Dietrich; Christian List
  13. On Optimal Transparency in Signaling By Mark Whitmeyer
  14. Tolerance and Compromise in Social Networks By Garance Genicot
  15. The Impact of Compatibility on Innovation in Markets with Network Effects By Steven Bond-Smith

  1. By: Iossa, Elisabetta; Rey, Patrick; Waterson, Michael
    Abstract: The paper studies competition for the market in a setting where incumbents (and, to a lesser extent, neighboring incumbents) benefi t from a cost advantage. The paper fi rst compares the outcome of staggered and synchronous tenders, before drawing the implications for market design. We find that the timing of tenders should depend on the likelihood of monopolization. When monopolization is expected, synchronous tendering is preferable, as it strengthens the pressure that entrants exercise on the monopolist. When instead other fi rms remain active, staggered tendering is preferable, as it maximizes the competitive pressure that comes from the other firms.
    Keywords: Dynamic procurement; incumbency advantage; local monopoly; competition; asymmetric auctions; synchronous contracts; staggered contracts
    JEL: D44 H40 H57 L43 L51 R48
    Date: 2019–01
  2. By: Anton Kolotilin; Andriy Zapechelnyuk
    Abstract: A principal can restrict an agent's information (the persuasion problem) or restrict an agent's discretion (the delegation problem). We show that these problems are generally equivalent - solving one solves the other. We use tools from the persuasion literature to generalize and extend many results in the delegation literature, as well as to address novel delegation problems, such as monopoly regulation with a participation constraint.
    Date: 2019–02
  3. By: Vincent Martinet (Economie Publique, AgroParisTech, Inra, Universtié Paris Saclay); Pedro Gajardo; Michel De Lara
    Abstract: We frame sustainability problems as bargaining problems among stakeholders who have to agree on a common development path. For infinite alternatives, the set of feasible payoffs is unknown, limiting the possibility to apply classical bargaining theory and mechanisms. We define a framework accounting for the economic environment, which specifies how the set of alternatives and payoff structure underlie the set of feasible payoffs and disagreement point. A mechanism satisfying the axioms of Independence of Non-Efficient Alternatives and Independence of Redundant Alternatives can be applied to a reduced set of alternatives producing all Pareto-efficient outcomes of the initial problem, and produces the same outcome. We exhibit monotonicity conditions under which such a subset of alternatives is computable. We apply our framework to dynamic sustainability problems. We characterize a « satisficing'' decision rule achieving any Pareto-efficient outcome. This rule is renegotiation-proof and generates a time-consistent path under the axiom of Individual Rationality.
    Keywords: social choice, axiomatic bargaining theory, economic environment, monotonicity, sustainability
    JEL: C70 Q01
    Date: 2019–01
  4. By: Abhijit Banerjee; Emily Breza; Arun G. Chandrasekhar; Markus Mobius
    Abstract: The DeGroot model has emerged as a credible alternative to the standard Bayesian model for studying learning on networks, offering a natural way to model naive learning in a complex setting. One unattractive aspect of this model is the assumption that the process starts with every node in the network having a signal. We study a natural extension of the DeGroot model that can deal with sparse initial signals. We show that an agent's social influence in this generalized DeGroot model is essentially proportional to the number of uninformed nodes who will hear about an event for the first time via this agent. This characterization result then allows us to relate network geometry to information aggregation. We identify an example of a network structure where essentially only the signal of a single agent is aggregated, which helps us pinpoint a condition on the network structure necessary for almost full aggregation. We then simulate the modeled learning process on a set of real world networks; for these networks there is on average 21.6% information loss. We also explore how correlation in the location of seeds can exacerbate aggregation failure. Simulations with real world network data show that with clustered seeding, information loss climbs to 35%.
    JEL: D8 D83 D85 O1 O12 Z13
    Date: 2019–01
  5. By: Johan N. M. Lagerlöf (Department of Economics, University of Copenhagen, Denmark)
    Abstract: This paper studies consumers’ incentives to hide their purchase histories when the seller’s prices depend on previous behavior. Through distinct channels, hiding both hinders and facilitates trade. Indeed, the social optimum involves hiding to some extent, yet not fully. Two opposing effects determine whether a consumer hides too much or too little: the first-period social gains are only partially internalized, and there is a private (socially irrelevant) second-period gain due to price differences. If time discounting is small, the second effect dominates and there is socially excessive hiding. This result is reversed if discounting is large.
    Keywords: behavior-based price discrimination, dynamic pricing, consumer protection, customer recognition, privacy
    JEL: D42 D80 L12 L40
    Date: 2018–12–03
  6. By: Saur, Marc P.; Schlatterer, Markus G.; Schmitt, Stefanie Yvonne
    Abstract: We analyze the effects of consumers' limited attention on welfare in a model of horizontal product differentiation. We present a novel approach of modeling limited attention: an attention radius. Each consumer only notices goods that are within her attention radius, i.e., goods that are sufficiently similar to her preferred version of the good. Limited attention induces firms to differentiate their products in a way that is beneficial to consumers. In addition, prices may be lower under limited than under full attention. Consumer surplus and welfare are not maximized under full attention but increase for some degree of limited attention.
    Keywords: Attention,Horizontal Product Differentiation,Hotelling,Price Discrimination
    JEL: D43 D91 L13
    Date: 2019
  7. By: Francesca Barigozzi (UNIBO - Università di Bologna [Bologna]); Izabela Jelovac (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Pharmaceutical innovations result from the successful achievement of basic research, produced by an upstream lab, and applied research, produced by a downstream lab. We focus on the negotiation process to finance basic research by setting public and private grants and to agree on the final price of a new drug. We show that exclusive funding of basic research is desirable. To increase consumers' surplus and reduce negotiated prices for new drugs, basic and applied research should be integrated if the lab producing applied research has a relatively large bargaining power. When instead the health authority has the larger bargaining power, integration with the producer of basic research increases negotiated prices for new drugs and should be avoided, unless the gain in bargaining power after the integration is extremely high. Abstract. Pharmaceutical innovations result from the successful achievement of basic research, produced by an upstream lab, and applied research, produced by a downstream lab. We focus on the negotiation process to finance basic research by setting public and private grants and to agree on the final price of a new drug. We show that exclusive funding of basic research is desirable. To increase consumers' surplus and reduce negotiated prices for new drugs, basic and applied research should be integrated if the lab producing applied research has a relatively large bargaining power. When instead the health authority has the larger bargaining power, integration with the producer of basic research increases negotiated prices for new drugs and should be avoided, unless the gain in bargaining power after the integration is extremely high.
    Keywords: Pharmaceutical innovation,drug prices,negotiation,basic research,applied research
    Date: 2019–01–21
  8. By: Bergantiños, Gustavo; Massó, Jordi; Neme, Alejandro
    Abstract: We study individually rational rules to be used to allot, among a group of agents, a perfectly divisible good that is freely available only in whole units. A rule is individually rational if, at each preference profile, each agent finds that her allotment is at least as good as any whole unit of the good. We study and characterize two individually rational and efficient rules, whenever agents' preferences are symmetric single-peaked on the set of possible allotments. The two rules are in addition envy-free, but they differ on wether envy-freeness is considered on losses or on awards. Our main result states that (i) the constrained equal losses rule is the unique individually rational and efficient rule that satisfies justified envy-freeness on losses and (ii) the constrained equal awards rule is the unique individually rational and efficient rule that satisfies envy-freeness on awards.
    Keywords: Division problem; Single-peaked preferences; Individual rationality; Efficiency; Strategy-proofness; Envy-freeness
    JEL: C78
    Date: 2019–01–25
  9. By: Seungjin Han
    Abstract: This paper studies pre-match investment competition with upper and lower bounds on feasible transfers to sellers in a general signaling environment, where the types of buyers and sellers are private information and the surplus may depend on both types and investments. Bounded transfers create methodological challenges - e.g., externalities in the bottom match, limits of a separate investment reward (or market utility) schedule for each side - that would be present even in a large market. To overcome such challenges, this paper proposes a notion of equilibrium that incorporates strategic behavior of a continuum of agents. Given our notion of equilibrium with bounded transfers, our model explains remarkably well why sellers and buyers in the bottom tail of the match distribution are stuck in a vicious cycle of a rat race, and how stars who stand out from the rest endogenously arise through pre-match investment competition.
    Keywords: bounded transfers, pre-match investment, matching, rat race, rise of stars
    JEL: C72 C78 D40 D82
    Date: 2019–01
  10. By: Jos\'e Cl\'audio do Nascimento
    Abstract: There are moments where we make decisions involving tradeoffs among costs and benefits occurring in different times. Essentially, in these cases, we are evaluating dynamic processes with outcomes still unknown. So, do we use some intuitive logic to judge changes involving values and time? The fuzzy temporal logic, introduced in this paper, proposes to model the figures of thought necessary to form a rhetoric for decision-making. To exemplify, the intertemporal choices and the lotteries choices are analyzed. The first problem is related to the time preference of receiving amounts on different dates. So it is shown that a subadditive hyperbolic discount function is not anomaly, but it consistently describes the goods delay within the fuzzy temporal logic. The second problem is related to values and probabilities of lotteries, where Prospect Theory behaviors and the S-shaped curve can be described using tense operators and fuzzy set operators. In addition, it is shown that some behaviors are amount dependent where the fuzziness can be decisive in the judgment. Thus, time, uncertainty and fuzziness are unified in a single matter which models the rhetoric for decision-making in different contexts of gains and losses.
    Date: 2019–01
  11. By: Jeanne Hagenbach (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Frédéric Koessler (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper proposes an equilibrium concept, Language-Based Expectation Equilibrium , which accounts for partial language understanding in sender-receiver cheap talk games. Each player is endowed with a privately known language competence which represents all the messages that he understands. For the messages he does not understand, he has correct but only coarse expectations about the equilibrium strategies of the other player. In general, a language-based expectation equilibrium outcome differs from Nash and communication equilibrium outcomes, but is always a Bayesian solution. Partial language competence of the sender rationalizes information transmission and lies in pure persuasion problems, and facilitates information transmission from a moderately biased sender.
    Keywords: Analogy-based expectations,Bayesian solution,bounded rationality,cheap talk,language,pure persuasion,strategic information transmission
    Date: 2019–01
  12. By: Franz Dietrich (Centre d'Economie de la Sorbonne Author-Workplace-Homepage:; Christian List (London School of Economics)
    Abstract: Agents are often assumed to have degrees of belief (“credences”) and also binary beliefs (“beliefs simpliciter”). How are these related to each other? A much-discussed answer asserts that it is rational to believe a proposition if and only if one has a high enough degree of belief in it. But this answer runs into the “lottery paradox”: the set of believed propositions may violate the key rationality conditions of consistency and deductive closure. In earlier work, we showed that this problem generalizes: there exists no local function from degrees of belief to binary beliefs that satisfies some minimal conditions of rationality and non-triviality. “Locality” means that the binary belief in each proposition depends only on the degree of belief in that proposition, not on the degrees of belief in others. One might think that the impossibility can be avoided by dropping the assumption that binary beliefs are a function of degrees of belief. We prove that, even if we drop the “functionality” restriction, there still exists no local relation between degrees of belief and binary beliefs that satisfies some minimal conditions. Thus functionality is not the source of the impossibility; its source is the condition of locality. If there is any non-trivial relation between degrees of belief and binary beliefs at all, it must be a “holistic” one. We explore several concrete forms this “holistic” relation could take.
    Keywords: binary beliefs (yes/no); subjective probabilities; construction of binary beliefs from subjective probabilities; impossibility theorem
    JEL: D81
    Date: 2019–01
  13. By: Mark Whitmeyer
    Abstract: We examine the classic "Beer-Quiche" game from Cho and Kreps (1987), and relax the assumption that the order placed by the sender is completely observable. Under the optimal degree of transparency, the receiver achieves a higher payoff than with full transparency. Partial obfuscation of the sender's choice encourages separation: committing to a less informative signal about the sender's choice affects the endogenous information generation process such that the receiver thereby secures himself more information.
    Date: 2019–02
  14. By: Garance Genicot
    Abstract: In this paper, individuals are characterized by their identity — an ideal code of conduct — and by a level of tolerance for behaviors that differ from their own ideal. Individuals first choose their behavior, then form social networks. This paper studies the possibility of compromise, i.e. individuals choosing a behavior different from their ideal point, in order to be accepted by others, to "belong.'' I first show that when tolerance levels are the same in society, compromise is impossible: individuals all choose their preferred behavior and form friendships only with others whose ideal point belong to their tolerance window. In contrast, I show that heterogeneity in tolerance allows for compromise in equilibrium. Moreover, if identity and tolerance are independently distributed, any equilibrium involves some compromise.
    JEL: D85 L14 O12 Z13
    Date: 2019–01
  15. By: Steven Bond-Smith (Bankwest Curtin Economic Centre, Curtin University)
    Abstract: This article analyses the relationship between compatibility and innovation in markets with network effects using a model of competition with endogenous R&D, commercialization and compatibility. Incumbent acquisition of an innovation or profit from entry provides entrepreneurs with an incentive for developing technological improvements. Entrepreneurs receive greater returns for the innovation if larger incumbents offer compatibility with their installed base. As a result, entrepreneurs must innovate strategically to pre-empt an incompatibility response from incumbents. Similarly, small incumbents also bid strategically to block entry or rival acquisition if it also avoids an incompatibility response from a larger incumbent. A credible threat of incompatibility reduces the entrepreneur?s reserve to sell an innovation, but can also increase offers to acquire the innovation from smaller incumbents attempting to avoid incompatibility. This leads to a complex relationship between the strength of network effects, innovation incentives, the entrepreneur?s ambition for improvement and potentially disrupting the compatibility regime. For weak to moderate network effects entrepreneurs are likely to target more substantial, but improbable innovations such that their network is sufficiently attractive for incumbents to offer compatibility. For a small range of sufficiently strong network effects, entrepreneurs target incremental innovations to avoid the incumbent threatening incompatibility.
    Keywords: network effects, innovation, compatibility
    JEL: L15 L26 L50 O31
    Date: 2018–12

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