nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒05‒06
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Foundations for optimal inattention By Ellis, Andrew
  2. Compactification of Extensive Form Games and Belief in the Opponents' Future Rationality By Shuige Liu
  3. Quasiseparable aggregation in games with common local utilities By Kukushkin, Nikolai
  4. Wait-and-See or Step in? Dynamics of Interventions By Foarta, Dana; Sugaya, Takuo
  5. Price-directed Consumer Search By Ding, Yucheng; Zhang, Tianle
  6. Mean Field Equilibrium: Uniqueness, Existence, and Comparative Statics By Light, Bar; Weintraub, Gabriel
  7. Samuelson's Approach to Revealed Preference Theory: Some Recent Advances By Demuynck, Thomas; Hjertstrand, Per
  8. Inconsistent time preferences and on-the-job search - when it pays to be naive By Matthias Fahn; Regina Seibel
  9. A Search Model of Experience Goods By Chen, Yongmin; Li, zhuozheng; Zhang, Tianle
  10. Dynamic Incentives for Buy-Side Analysts By Rahul Deb; Mallesh M. Pai; Maher Said
  11. The Optimal Sequence of Prices and Auctions By Zhang, Hanzhe
  12. Optimal Commissions and Subscriptions in Networked Markets By Birge, John R.; Candogan, Ozan; Chen, Hongfan; Saban, Daniela
  13. Efficiency in Truthful Auctions via a Social Network By Seiji Takanashi; Takehiro Kawasaki; Taiki Todo; Makoto Yokoo
  14. Of course Collusion Should be Prosecuted. But Maybe... Or (The case for international antitrust agreements) By Filomena Garcia; Jose Manuel Paz y Minõ; Gustavo Torrens

  1. By: Ellis, Andrew
    Abstract: This paper models an agent who has a limited capacity to pay attention to information and thus conditions her actions on a coarsening of the available information. An optimally inattentive agent chooses both her coarsening and her actions by maximization of an underlying subjective expected utility preference relation, net of a cognitive cost of attention. The main result axiomatically characterizes the conditional choices of actions by an agent that are necessary and sufficient for her behavior to be seen as if it is the result of optimal inattention. Observing these choices permits unique identification of the agent’s utility index, the information to which she pays attention, her attention cost and her prior whenever information is costly.
    Keywords: inattention; optimal inattention; conditional choice
    JEL: J1
    Date: 2017–10–23
  2. By: Shuige Liu
    Abstract: We introduce an operation, called compactification, to reduce an extensive form to a compact one where each decision node in the game tree can be assigned to more than one player. Motivated by Thompson (1952)'s interchange of decision nodes, we attempt to capture the notion of a faithful representation of the chronological order of the moves in dynamic games which plays an important role in fields like epistemic game theory. The compactification process preserves perfect recall and the unambiguity of the order among information sets. We specify an algorithm, called leaf-to-root process, which compactifies at least as many information sets as any other compactification process. The compact extensive form provides an approach to avoid problems in dynamic game theory due to the vague definition of the chronological order of the moves, for example, belief in the opponents' future rationality (Perea (2014)) is sensitivity to the specific extensive form representative. We show that any strategy which can rationally be chosen under common belief in future rationality in a minimal compact game if and only if it satisfies this property in every extensive form game which can be related to it via some compactification process.
    Date: 2019–05
  3. By: Kukushkin, Nikolai
    Abstract: Strategic games are considered where each player's total utility is an aggregate of local utilities obtained from the use of certain "facilities." All players using a facility obtain the same utility therefrom, which may depend on the identities of users and on their behavior. Individual improvements in such a game are acyclic if a "trimness" condition is satisfied by every facility and all aggregation rules are consistent with a separable ordering. Those conditions are satisfied, for instance, by bottleneck congestion games with an infinite set of facilities. Under appropriate additional assumptions, the existence of a Nash equilibrium is established.
    Keywords: Bottleneck congestion game; Game with structured utilities; Potential game; Aggregation; Separable ordering
    JEL: C72
    Date: 2019–04–30
  4. By: Foarta, Dana (Stanford GSB); Sugaya, Takuo (Stanford GSB)
    Abstract: We study when and how intervention to stop a project is optimally used in a repeated relationship between a principal and a policymaker. The policymaker is privately informed about his ability, where a higher ability policymaker has a lower cost of producing a good project. He also privately chooses how much effort to supply on the project. Before the project is completed, the principal receives a signal about its outcome and can intervene to stop it from taking effect. Intervention may prevent a bad outcome, but no intervention leads to better learning about the policymaker’s ability. In the benchmark with observable effort, it is optimal to intervene only when the policymaker’s reputation is sufficiently low. If effort is not observable, the optimal response features switching between intervention and no intervention on the equilibrium path. The model rationalizes intervention technologies implemented in practice by supranational agreements and governing coalitions.
    JEL: D78 D82 H77
    Date: 2018–10
  5. By: Ding, Yucheng; Zhang, Tianle
    Abstract: We extend Stahl's (1989) model to a setting with differentiated products to study the effects of price-directed consumer search. Consumers engage in costly search to find out whether products meet their needs. Consumer search is directed by prices when they are observable before search, in contrast to the case in which prices are discovered only after search, where search is naturally random. The equilibrium under price-directed search differs substantially from that under random search, despite certain similarities. We show that as search costs decrease, sales become more likely and firms earn higher expected profits under price-directed search, whereas the opposite holds under random search. Moreover, compared with random search, under price-directed search firms' expected profits are always lower, but consumer surplus and total welfare are higher provided that the search cost is sufficiently small.
    Keywords: Consumer search, Observable price, Search cost
    JEL: D8 L1
    Date: 2018–03–08
  6. By: Light, Bar (Graduate School of Business, Stanford University); Weintraub, Gabriel (Graduate School of Business, Stanford University)
    Abstract: The standard solution concept for stochastic games is Markov perfect equilibrium (MPE); however, its computation becomes intractable as the number of players increases. Instead, we consider mean field equilibrium (MFE) that has been popularized in the recent literature. MFE takes advantage of averaging effects in models with a large number of agents. We make three main contributions. First, our main result in the paper provides conditions that ensure the uniqueness of an MFE. Second, we generalize previous MFE existence results. Third, we provide general comparative statics results. We apply our results to dynamic oligopoly models and to heterogeneous agent macroeconomic models commonly used in previous work. We believe our uniqueness result is the first of its nature in the class of models we study.
    Date: 2018–10
  7. By: Demuynck, Thomas (ECARES, Université Libre de Bruxelles); Hjertstrand, Per (Research Institute of Industrial Economics (IFN))
    Abstract: Since Paul Samuelson introduced the theory of revealed preference, it has become one of the most important concepts in economics. This chapter surveys some recent contributions in the revealed preference literature. We depart from Afriat's theorem, which provides the conditions for a data set to be consistent with the utility maximization hypothesis. We provide and motivate a new condition, which we call the Varian inequalities. The advantage of the Varian inequalities is that they can be formulated as a set of mixed integer linear inequalities, which are linear in the quantity and price data. We show how the Varian inequalities can be used to derive revealed preference tests for weak separability, and show how it can be used to formulate tests of the collective household model. Finally, we discuss measurement errors in the observed data and measures of goodness-of-fit, power and predictive success.
    Keywords: Afriats theorem; Collective household model; GARP; Mixed integer linear programing; Revealed preference; Varian inequalities; Weak separability
    JEL: C60 C63 D01 D11
    Date: 2019–04–23
  8. By: Matthias Fahn; Regina Seibel
    Abstract: We study optimal employment contracts for present-biased employees who can conduct on-the-job search. Presuming that firms cannot offer long-term contracts, we find that individuals who are naive about their present bias will actually be better off than sophisticated or time-consistent individuals. Moreover, they search more, which partially counteracts the inefficiencies caused by their present bias.
    Keywords: present bias, on-the-job search
    JEL: D21 D83 D90 J31 J32
    Date: 2019
  9. By: Chen, Yongmin; Li, zhuozheng; Zhang, Tianle
    Abstract: The economics literature on consumer search has focused on inspection goods, the quality of which is observed before purchase. This paper studies a model of experience goods where consumers search for desired varieties but can observe product quality only after consumption. The model yields price and welfare results that are contrary to those for inspection goods. Specifically, we find that equilibrium price may rise even when search intensity is higher and, under plausible conditions, both consumer and social welfare are initially increasing in search cost. Our analysis shows that quality observability is a key determinant of how search markets function.
    Keywords: consumer search, experience goods, inspection goods, product quality, search cost
    JEL: D8 L1
    Date: 2019–04–28
  10. By: Rahul Deb; Mallesh M. Pai; Maher Said
    Abstract: We develop a dynamic adverse selection model where a career-concerned buy-side analyst advises a fund manager about investment decisions. The analyst's ability is privately known, as is any information she learns over time. The manager wants to elicit information to maximize fund performance while also identifying and retaining high-skill analysts. We characterize the optimal dynamic contract, show that it has several features supported by empirical evidence, and derive novel testable implications. The fund manager's optimal contract both maximizes the value of information and screens out low-skill analysts by incentivizing the analyst to always provide honest advice.
    Keywords: buy-side analysts, career concerns, analyst recommendations, forecasting, dynamic mechanism design
    JEL: D82 D83 D86 G11 G14 G23
    Date: 2019
  11. By: Zhang, Hanzhe (Michigan State University, Department of Economics)
    Abstract: A seller chooses to either post a price or run a reserve-price auction each period to sell a good before a deadline. Buyers with independent private values arrive over time. Assume that an auction costs more to the seller than a posted price. For a wide range of auction costs, the profit-maximizing mechanism sequence is to post prices first and then to run auctions. The optimality of the prices-then-auctions mechanism sequence provides a new justification for the use of the buy-it-now selling format on eBay.
    Keywords: buy-it-now; posted price; reserve price auction
    JEL: D44
    Date: 2019–04–24
  12. By: Birge, John R. (Booth School of Business, University of Chicago); Candogan, Ozan (Booth School of Business, University of Chicago); Chen, Hongfan (Booth School of Business, University of Chicago); Saban, Daniela (Graduate School of Business, Stanford University)
    Abstract: Two salient features of most online platforms are that they do not dictate the transaction prices, and use commissions/subscriptions for extracting revenues. We consider a platform that charges commission rates and subscription fees to sellers and buyers for facilitating transactions, but does not directly control the transaction prices, which are determined by the traders. Buyers and sellers are divided into types, and we represent the compatibility between different types using a bipartite network. Traders are heterogeneous in terms of their valuations, and different types have possibly different value distributions. The platform chooses commissions-subscriptions to maximize its revenues. We provide a convex optimization formulation to calculate the revenue-maximizing commissions/subscriptions, and establish that, typically, different types should be charged different commissions/subscriptions depending on their network positions. We establish lower and upper bounds on the platform’s revenues in terms of the supply-demand imbalance across the network. Motivated by simpler schemes used in practice, we show that the revenue loss can be unbounded when all traders on the same side are charged the same commissions/subscriptions, and bound the revenue loss in terms of the supply-demand imbalance across the network. Charging only buyers or only sellers leads to a (bounded) revenue loss, even when different types on the same side can be charged differently. Under mild assumptions, we establish that a revenue-maximizing platform achieves at least 2/3 of the maximum achievable social welfare. Our results highlight the suboptimality of commonly used payment schemes, and showcase the importance of accounting for the compatibility between different user types.
    Date: 2018–09
  13. By: Seiji Takanashi; Takehiro Kawasaki; Taiki Todo; Makoto Yokoo
    Abstract: In this paper, we study efficiency in truthful auctions via a social network, where a seller can only spread the information of an auction to the buyers through the buyers' network. In single-item auctions, we show that no mechanism is strategy-proof, individually rational, efficient, and weakly budget balanced. In addition, we propose $\alpha$-APG mechanisms, a class of mechanisms which operate a trade-off between efficiency and weakly budget balancedness. In multi-item auctions, there already exists a strategy-proof mechanism when all buyers need only one item. However, we indicate a counter-example to strategy-proofness in this mechanism, and to the best of our knowledge, the question of finding a strategy-proof mechanism remains open. We assume that all buyers have decreasing marginal utility and propose a generalized APG mechanism that is strategy-proof and individually rational but not efficient. Importantly, we show that this mechanism achieves the largest efficiency measure among all strategy-proof mechanisms.
    Date: 2019–04
  14. By: Filomena Garcia (Indiana University, & UECE); Jose Manuel Paz y Minõ (Indiana University); Gustavo Torrens (Indiana University)
    Abstract: We study the incentives of competition authorities to prosecute collusive practices of domestic and foreign firms. For that purpose, we develop a model of multi-market contact between two firms that can engage in collusion in two countries. In each country, there is a competition authority with a mandate to maximize national welfare. Each competition authority decides its prosecution policy at the beginning of time and commits to it. In equilibrium, the ownership distribution of the firms (domestic versus foreign) affects prosecution policies. The country that does not own the firms prosecutes them as soon as information of collusion becomes available. On the contrary, the country that owns the firms has an incentive to protect their profits in foreign markets delaying prosecution. This strategic delay is valuable because it contains the information spreading that could trigger prosecution in the foreign country. Prosecution delays, however, are not optimal from the point of view of global welfare, something that could be solved through the integration of the competition authorities. The country of origin of the firms would nevertheless oppose integration. Finally, in a multi-industry setting, both countries delay prosecuting domestic firms, which again is not optimal from the point of view of global welfare. Moreover, in a multi-industry setting, both countries can be better off under integration.
    Keywords: Multi-market Collusion, Antitrust Policy, Strategic Prosecution, International Antitrust Agreements
    JEL: F23 F53 L41 K21
    Date: 2018–05

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