nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒09‒09
eleven papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Sequential procurement with limited commitment By Fugger, Nicolas; Gretschko, Vitali; Pollrich, Martin
  2. Global Games With Strategic Complements and Substitutes By Eric J. Hoffmann; Tarun Sabarwal
  3. Prudent Rationalizability in Generalized Extensive-Form Games with Unawareness By Burkhard C. Schipper; Martin Meier; Aviad Heifetz
  4. Regulating Insurance Markets: Multiple Contracting and Adverse Selection By Attar, Andrea; Mariotti, Thomas; Salanié, François
  5. On the Existence of Equilibrium in Bayesian Games Without Complementarities By Idione Meneghel; Rabee Tourky
  6. Optimal Search Segmentation Mechanisms for Online Platform Markets By Zhenzhe Zheng; R. Srikant
  7. A Simple Solution to the Problem of Independence of Irrelevant Alternatives in Choo and Siow Marriage Market Model By Gutierrez, Federico H.
  8. A Theory of Power Wars By Herrera, Helios; Morelli, Massimo; Nunnari, Salvatore
  9. Sequencing R&D decisions with a consumer-friendly firm and spillovers By Leal, Mariel; Garcia, Arturo; Lee, Sang-Ho
  10. New developments in revealed preference theory: decisions under risk, uncertainty, and intertemporal choice By Federico Echenique
  11. A Cardinal Comparison of Experts By Itay Kavaler; Rann Smorodinsky

  1. By: Fugger, Nicolas; Gretschko, Vitali; Pollrich, Martin
    Abstract: We analyze the problem of a buyer who chooses a supplier for a long-term relationship via an auction. The buyer lacks commitment to not renegotiate the terms of the contract in the long run. Thus, suppliers are cautious about the information revealed during the auction. We show theoretically and experimentally that first-price auctions perform poorly in terms of efficiency and buyer surplus. Suppliers may pool on a high bid to conceal information. Second-price auctions retain their efficient equilibrium and generate substantial surplus for the buyer. We demonstrate that optimal mechanisms require concealing the winning bid with a strictly positive probability.
    Date: 2019
  2. By: Eric J. Hoffmann (Department of Economics, The University of Kansas); Tarun Sabarwal (Department of Economics, University of Kansas)
    Abstract: We extend the global games method to the class of finite player, finite action games that includes games with strategic complements, games with strategic substitutes, and arbitrary combinations of the two. Our result is based on common order properties present in both strategic complements and substitutes, the notion of p-dominance, and the use of dominance solvability as the solution concept. In addition to being closer to the original arguments in Carlsson and van Damme (1993), our approach requires fewer additional assumptions. In particular, we require only one dominance region, and no assumptions on state monotonicity, or aggregative structure, or overlapping dominance regions. As expected, the p-dominance condition becomes more restrictive as the number of players increases. In cases where the probabilistic burden in belief formation may be reduced, the p-dominance condition may be relaxed as well. We present examples that are not covered by existing results.
    Keywords: Global games, Strategic complements, Strategic substitutes, Monotone games, Equilibrium selection
    JEL: C70 C72
    Date: 2019–08
  3. By: Burkhard C. Schipper; Martin Meier; Aviad Heifetz (Department of Economics, University of California Davis)
    Abstract: We define a cautious version of extensive-form rationalizability for generalized extensive-form games with unawareness that we call prudent rationalizability. It is an extensive-form analogue of iterated admissibility. In each round of the procedure, for each tree and each information set of a player a surviving strategy of hers is required to be rational vis-a-vis a belief system with a full-support belief on the opponents' previously surviving strategies that reach that information set. We demonstrate the applicability of prudent rationalizability. In games of disclosure of verifiable information, we show that prudent rationalizability yields unraveling under full awareness but unraveling might fail under unawareness. We compare prudent rationalizability to extensive-form rationalizability. We show that prudent rationalizability may not refine extensive-form rationalizability strategies but conjecture that the paths induced by prudent rationalizable strategy profiles (weakly) refine the set of paths induced by extensive-form rationalizable strategies.
    Keywords: Caution, extensive-form rationalizability, unawareness, disclosure, verifiable information, persuasion games, iterated admissibility, common strong cautious belief in rationality
    JEL: C72 D83
    Date: 2019–08–28
  4. By: Attar, Andrea; Mariotti, Thomas; Salanié, François
    Abstract: We study insurance markets in which privately informed consumers can purchase coverage from several firms whose pricing strategies are subject to an anti-dumping regulation. The resulting regulated game supports a single allocation in which each layer of coverage is fairly priced given the consumer types who purchase it. This competitive allocation cannot be Pareto-improved by a social planner who can neither observe consumer types nor monitor their trades with firms. Accordingly, we argue that public intervention under multiple contracting and adverse selection should penalize firms that cross-subsidize between contracts, while leaving consumers free to choose their preferred amount of coverage.
    Keywords: Insurance Markets, Regulation, Multiple Contracting, Adverse Selection.
    JEL: D43 D82 D86
    Date: 2019–08
  5. By: Idione Meneghel (Australian National University College of Business and Economics); Rabee Tourky (Australian National University College of Business and Economics)
    Abstract: In a recent paper, Reny (2011) generalized the results of Athey (2001) and McAdams (2003) on the existence of monotone strategy equilibrium in Bayesian games. Though the generalization is subtle, Reny introduces far-reaching new techniques applying the fixed point theorem of Eilenberg and Montgomery (1946, Theorem 5). This is done by showing that with atomless type spaces the set of monotone functions is an absolute retract and when the values of the best response correspondence are non-empty sub-semilattices of monotone functions, they too are absolute retracts. In this paper, we provide an extensive generalization of Reny (2011), McAdams (2003), and Athey (2001). We study the problem of existence of Bayesian equilibrium in pure strategies for a given partially ordered compact subset of strategies. The ordering need not be a semilattice and these strategies need not be monotone. The main innovation is the interplay between the homotopy structures of the order complexes that are the subject of the celebrated work of Quillen (1978), and the hulling of partially ordered sets, an innovation that extends the properties of Reny’s semilattices to the non-lattice setting. We then describe some auctions that illustrate how this framework can be applied to generalize the existing results and extend the class of models for which we can establish existence of equilibrium. As with Reny (2011), our proof utilizes the fixed point theorem in Eilenberg and Montgomery (1946).
    Keywords: Bayesian games, Monotone strategies, Pure-strategy equilibrium, Auctions
    Date: 2019–08
  6. By: Zhenzhe Zheng; R. Srikant
    Abstract: Online platforms, such as Airbnb,, Amazon, Uber and Lyft, can control and optimize many aspects of product search to improve the efficiency of marketplaces. Here we focus on a common model, called the discriminatory control model, where the platform chooses to display a subset of sellers who sell products at prices determined by the market and a buyer is interested in buying a single product from one of the sellers. Under the commonly-used model for single product selection by a buyer, called the multinomial logit model, and the Bertrand game model for competition among sellers, we show the following result: to maximize social welfare, the optimal strategy for the platform is to display all products; however, to maximize revenue, the optimal strategy is to only display a subset of the products whose qualities are above a certain threshold. We extend our results to Cournot competition model, and show that the optimal search segmentation mechanisms for both social welfare maximization and revenue maximization also have simple threshold structures. The threshold in each case depends on the quality of all products, the platform's objective and seller's competition model, and can be computed in linear time in the number of products.
    Date: 2019–08
  7. By: Gutierrez, Federico H.
    Abstract: This paper proposes a simple solution to the independence of irrelevant alternatives (IIA) problem in Choo and Siow (2006) model, overcoming what is probably the main limitation of this approach. The solution consists of assuming match-specific rather than choice-specific random preferences. The original marriage matching function gets modified by an adjustment factor that improves its empirical properties. Using the American Community Survey, I show that the new approach yields significantly different results affecting the qualitative conclusions of the analysis. The proposed solution to the IIA problem applies to other settings in which the relative "supply" of choices is observable.
    Keywords: Independence of irrelevant alternatives,marriage market,transferable utility
    JEL: J12 J16 J10
    Date: 2019
  8. By: Herrera, Helios; Morelli, Massimo; Nunnari, Salvatore
    Abstract: This paper provides a theory of how war onset and war duration depend on the initial distribution of power when conflict triggers a reallocation of power but the loser is not eliminated. In the model, players take into account not only the expected consequences of war on the current distribution of resources, but also its expected consequences on the future distribution of military and political power. We highlight three main results: the key driver of war, in both the static and the dynamic game, is the mismatch between military and political power; dynamic incentives usually amplify static incentives, leading forward-looking players to be more aggressive; and a war is more likely to last for longer if political power is initially more unbalanced than military power and the politically under-represented player is militarily advantaged.
    Keywords: Balance of powers; War Duration
    Date: 2019–08
  9. By: Leal, Mariel; Garcia, Arturo; Lee, Sang-Ho
    Abstract: This study considers a duopoly model in which both a consumer-friendly (CF) firm and a for-profit (FP) firm undertake cost-reducing R&D investments in an endogenous R\&D timing game and then play Cournot output competition. When the CF firm chooses its profit-oriented consumer-friendliness, we show that the consumer-friendliness is non-monotone in spillovers under both simultaneous-move and sequential-move with FP firm’s leadership while it is decreasing under sequential-move with CF firm’s leadership. We also show that a simultaneous-move outcome is a unique equilibrium when the spillovers are low and the CF firm invests higher R&D and obtains higher profits. When the spillovers are not low, two sequential-move outcomes appear and the CF firm might obtain lower profits with higher spillovers under the CF firm leadership.
    Keywords: simultaneous R&D decisions; sequential R&D decisions; consumer-friendly firm; R&D spillovers
    JEL: L21 M21 O32
    Date: 2019–08
  10. By: Federico Echenique
    Abstract: The chapter reviews recent developments in revealed preference theory. It discusses the testable implications of theories of choice that are germane to specific economic environments. The focus is on expected utility in risky environments; subjected expected utility and maxmin expected utility in the presence of uncertainty; and exponentially discounted utility for intertemporal choice. The testable implications of these theories for data on choice from classical linear budget sets are described, and shown to follow a common thread. The theories all imply an inverse relation between prices and quantities, with different qualifications depending on the functional forms in the theory under consideration.
    Date: 2019–08
  11. By: Itay Kavaler; Rann Smorodinsky
    Abstract: In various situations decision makers face experts that may provide conflicting advice. This advice may be in the form of probabilistic forecasts over critical future events. We consider a setting where the two forecasters provide their advice repeatedly and ask whether the decision maker can learn to compare and rank the two forecasters based on past performance. We take an axiomatic approach and propose three natural axioms that a comparison test should comply with. We propose a test that complies with our axioms. Perhaps, not surprisingly, this test is closely related to the likelihood ratio of the two forecasts over the realized sequence of events. More surprisingly, this test is essentially unique. Using results on the rate of convergence of supermartingales we show that whenever the two experts' advice are sufficiently distinct the proposed test will detect the informed expert in any desired degree of precision in some fixed finite time.
    Date: 2019–08

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