nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒10‒14
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Incomplete contracts in dynamic procurement By Gretschko, Vitali; Pollrich, Martin
  2. Matching with Externalities By Pycia, Marek; Yenmez, M. Bumin
  3. Optimal Price of Entry into a Competition By Ginzburg, Boris
  4. Deceptive Products on Platforms By Johannes Johnen; Robert Somogyi
  5. Multimarket Contact and Platform Competition: Reassessing the Mutual Forbearance Hypothesis By Eric Darmon; Thomas Le Texier; Zhiwen Li; Thierry Pénard
  6. Optimal persuasion with an application to media censorship By Anton Kolotilin; Tymofiy Mylovanov; Andriy Zapechelnyuk
  7. Market Size and Competition: A "Hump-Shaped" Result By Grant, Iris; Kesternich, Iris; Schumacher, Heiner; Van Biesebroeck, Johannes
  8. Experimentation in Organizations By Sofia Moroni
  9. Group Hug: Platform Competition with User-groups By Sarit Markovich; Yaron Yehezkel
  10. Tying in evolving industries, when future entry cannot be deterred By Fumagalli, Chiara; Motta, Massimo
  11. On The Existence of Equilibrium In Bayesian Games Without Complementarities By Idione Meneghel; Rabee Tourky
  12. Credible signals: A refinement of perfect Bayesian equilibria By Jorge M. Streb
  13. Risk-averse optimal stopping under ambiguity and partial information By Randall Martyr; John Moriarty
  14. Trading and shareholder voting By Levit, Doron; Malenko, Nadya; Maug, Ernst
  15. Sequentially Mixed Search and Equilibrium Price Dispersion By Shouyong Shi
  16. Susceptibility to Manipulation by Sincere Truncation : the Case of Scoring Rules and Scoring Runoff Systems By Eric Kamwa; Issofa Moyouwou
  17. Information Acquisition and Diffusion in Markets By Atayev, Atabek; Janssen, Maarten

  1. By: Gretschko, Vitali; Pollrich, Martin
    Abstract: We analyze the problem of a buyer who purchases a long-term project from one of several suppliers. A changing state of the world influences the costs of the suppliers. Complete contracts conditioning on all future realizations of the state are infeasible. We show that contractual incompleteness comes without a cost. The buyer achieves the same surplus with complete and incomplete contracts. The key insight is that the allocation prescribed by optimal complete contracts is sequentially optimal with incomplete contracts if the buyer does not receive too much information ex-interim. We show that the English auction restricts the information optimally.
    Keywords: incomplete contracts,repeated relationships,procurement,commitment
    JEL: D44 D82 H57
    Date: 2019
  2. By: Pycia, Marek; Yenmez, M. Bumin
    Abstract: We incorporate externalities into the stable matching theory of two-sided markets. Extending the classical substitutes condition to allow for externalities, we establish that stable matchings exist when agent choices satisfy substitutability. Furthermore, we show that substitutability is a necessary condition for the existence of a stable matching in a maximal-domain sense and provide a characterization of substitutable choice functions. In addition, we establish novel comparative statics on externalities and show that the standard insights of matching theory, like the existence of side-optimal stable matchings and the deferred acceptance algorithm, remain valid despite the presence of externalities even though the standard fixed-point techniques do not apply.
    JEL: C78 D62
    Date: 2019–09
  3. By: Ginzburg, Boris
    Abstract: A continuum of agents are choosing whether to enter a competition. Entry is controlled by a firm that charges a price for it. The mass of agents is uncertain. I analyse how the distribution of the mass of agents determines the equilibrium price and the intensity of entry. A shift of the distribution towards more mass initially induces a reduction of price, and later – a reduction in entry.
    Keywords: contests, entry, university admission tests
    JEL: C72 D82
    Date: 2019–10–05
  4. By: Johannes Johnen (CORE and LIDAM, Universite catholique de Louvain, Voie du Roman Pays 34, 1348 Ottignies-Louvain-la-Neuve, Belgium); Robert Somogyi (Budapest University of Technology and Economics, Department of Finance and Centre for Economic and Regional Studies, Magyar tudosok korutja 2, 1117 Budapest, Hungary)
    Abstract: On many online platforms, sellers offer products with additional fees and features. Platforms often deliberately shroud these fees from consumers. Examples are shipping fees, luggage fees on flight-aggregator websites, or resort fees and upgrades on hotel booking platforms. We explore the incentives of two-sided platforms to disclose additional fees and design a transparent marketplace when consumers might naively ignore shrouded additional fees. First, we find that platforms have stronger incentives to shroud additional fees than sellers in the absence of platforms. This result holds for monopoly platforms and in some competitive settings. Second, competition might induce platforms to regulate additional fees, which benefits consumers. We discuss connections to frequent practices like drip pricing, and platforms like Amazon or eBay regulating shipping fees.
    Keywords: Two-sided markets; Deceptive products; Platform competition; Consumer mistakes; Shrouded attributes
    JEL: D18 D42 D90 L13 L86
    Date: 2019–09
  5. By: Eric Darmon (Univ Rennes, CNRS, CREM - UMR 6211, F-35000 Rennes, France); Thomas Le Texier (Univ Rennes, CNRS, CREM - UMR 6211, F-35000 Rennes, France); Zhiwen Li (School of Management, Jiangsu University, China); Thierry Pénard (Univ Rennes, CNRS, CREM - UMR 6211, F-35000 Rennes, France)
    Abstract: Antitrust authorities are particularly concerned with the dominant market position of tech giants such as Google, Facebook, and Amazon. These digital conglomerates are characterized by platform-based business models. However, despite their dominance, they are competing with each other to attract the same groups of users (developers, advertisers, end users, third party sellers, etc). They therefore have not only overlapping users (or sides) but also multimarket contact (MMC). In traditional one-sided markets, theory and empirical evidence show that MMC tends to relax competition. However, it is unclear whether this result holds under platform competition. This paper examines how MMC a ects pricing behaviour and pro ts of two-sided platforms. We develop a model of platform competition with two distinct markets. We assume that platforms only charge one group of users and provide free access to the other group. We argue that multimarket platforms also generate cross-market externalities that favour their users, in addition to well-known cross-group externalities. We nd that when cross-market externalities bene t the side that has free access, price competition is ercer and total welfare increases under MMC. However, when they bene t the side that pays to access the platform, the same result only holds if the cross-group externality and/or cross-market externality are suciently high. Finally, we show that a single-market platform competing with a multimarket platform may be deterred from entering the second market if cross-market or cross-group externalities are high. Our ndings contrast with the mutual forbearance hypothesis which claims that MMC relaxes competition in traditional (one-sided) industries. From a competition policy perspective, our paper provides an insight into how antitrust authorities should review conglomerate mergers and assess the e ects of diversi cation strategies of digital platforms.
    Keywords: two-sided markets, platform competition, multimarket contact, conglomerate, digital markets
    JEL: L13 L49 L86
    Date: 2019–09
  6. By: Anton Kolotilin (UNSW Australia); Tymofiy Mylovanov (University of Pittsburgh); Andriy Zapechelnyuk (University of St Andrews)
    Abstract: A sender designs a signal about the state of the world to persuade a receiver. Under standard assumptions, an optimal signal reveals the states below a cutoff and pools the states above the cutoff. This result holds in continuous and discrete environments. The optimal signal is less informative if the sender is more biased and if the receiver is easier to persuade. We apply our results to the problem of media censorship by a government.
    Keywords: Bayesian persuasion, information design, upper censorship, lower censorship, media censorship
    JEL: D82 D83 L82
    Date: 2019–10–03
  7. By: Grant, Iris; Kesternich, Iris; Schumacher, Heiner; Van Biesebroeck, Johannes
    Abstract: An active empirical literature estimates entry threshold ratios, introduced by Bresnahan and Reiss (1991), to learn about the impact of firm entry on the strength of competition. These ratios measure the increase in minimum market size needed per firm to sustain one additional firm in the market. We show that there is no monotonic relationship between a change in the entry threshold ratio and a change in the strength of competition or in the price-cost margin. In the standard homogenous goods oligopoly model with linear or constant elasticity demand, the ratio is hump-shaped in the number of active firms, increasing at first and only when additional firms enter it gradually decreases and converges to one. Empirical applications should use caution and interpret changes in the entry threshold ratios as indicative of changes in competition only from the third entrant onwards.
    Keywords: Competition; Entry Threshold Ratio; Market entry; market size
    JEL: D43 L13
    Date: 2019–09
  8. By: Sofia Moroni
    Abstract: We consider a moral hazard problem in which a principal provides incentives to a team ofagents to work on a risky project. The project consists of two milestones of unknown feasibility.While working unsuccessfully, the agents’ private beliefs regarding the feasibility of theproject decline. This learning requires the principal to provide rents to prevent the agents fromprocrastinating and free-riding on others’ discoveries. To reduce these rents the principal stopsthe project inefficiently early and gives identical agents asymmetric experimentation assignments.The principal prefers to reward agents with better contract terms or task assignmentsrather than monetary bonuses.
    Date: 2019–01
  9. By: Sarit Markovich (Kellogg School of Management, Northwestern University, Evanston, IL, USA); Yaron Yehezkel (Coller School of Management, Tel Aviv University, Ramat Aviv, Israel)
    Abstract: We consider platform competition in the presence of small users and a user-group. One platform enjoys a quality advantage and the other benefits from favorable beliefs. We study whether the group mitigates the users' coordination problem –i.e., joining a low-quality platform because they believe that other users would do the same. We find that when the group is sufficiently large to facilitate coordination on the high-quality platform, the group may choose to join the low-quality one. When the group joins the more efficient platform it does not necessarily increase consumer surplus. Specifically, a non-group user benefits from a group with an intermediate size, and prefers a small group over a large group. The utility of a group user is also non-monotonic in the size of the group.
    Keywords: network externalities; coordination
    JEL: L1
    Date: 2019–09
  10. By: Fumagalli, Chiara; Motta, Massimo
    Abstract: We show that the incentive to engage in exclusionary tying (of two complementary products) may arise even when the incumbent's dominant position in the primary market cannot be protected. By engaging in tying, an incumbent firm sacrifices current profits but can exclude a more efficient rival from a complementary market by depriving it of the critical scale it needs to be successful. In turn, exclusion in the complementary market allows the incumbent to be in a favorable position when a more efficient rival will enter the primary market, and to appropriate some of the rival's efficiency rents. The paper also shows that tying is a more profitable exclusionary strategy than pure bundling, and that exclusion is the less likely the higher the proportion of consumers who multi-home.
    Keywords: Inefficient foreclosure; network externalities; Scale Economies; Tying
    JEL: K21 L41
    Date: 2019–09
  11. By: Idione Meneghel; Rabee Tourky
    Abstract: 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: 2019–09
  12. By: Jorge M. Streb
    Abstract: Signals are voluntary actions a sender may use to reveal its type. When this simple insight is formalized, a bewildering plethora of perfect Bayesian equilibria arise. In particular, separating equilibria are possible when no type has an incentive to separate and pooling equilibria are possible when all types do. This motivates a refinement for signaling games. A deviation from an equilibrium is credible if and only if it forms part of an alternative equilibrium where payoffs (weakly) increase. The self-selection condition then puts zero probability, when possible, on sender types for which a deviation from equilibrium is not credible. Las señales son acciones voluntarias del emisor para revelar su tipo. Cuando esto se formaliza, surge una plétora de equilibrios bayesianos perfectos. Son posibles equilibrios con diferenciación a pesar de que nadie tiene un incentivo para diferenciarse y equilibrios con mimetización a pesar de que todos sí lo tienen. Esto motiva un refinamiento para juegos de señales. Un desvío de un equilibrio es creíble si y solo si forma parte de un equilibrio alternativo donde los pagos aumentan (en sentido débil). La condición de autoselección pone probabilidad cero a los tipos para los cuáles un desvío no es creíble.
    Keywords: perfect Bayesian equilibrium, refinement, signals, credible deviations, self-selection condition
    JEL: D8 C7
    Date: 2018–12
  13. By: Randall Martyr; John Moriarty
    Abstract: We obtain structural results for non-Markovian optimal stopping problems in discrete time when the decision maker is risk averse and has partial information about the stochastic sequences generating the costs. Time consistency is ensured in the problem by the aggregation of a sequence of conditional risk mappings, and the framework allows for model ambiguity. A reflected backward stochastic difference equation is used to characterise the value function and optimal stopping times.
    Date: 2019–10
  14. By: Levit, Doron; Malenko, Nadya; Maug, Ernst
    Abstract: We study shareholder voting in a model in which trading affects the composition of the shareholder base. In this model, trading and voting are complementary, which gives rise to self-fulfilling expectations about proposal acceptance. We show three main results. First, increasing liquidity and trading opportunities may reduce prices and welfare, because it allows shareholders with more extreme preferences to accumulate large positions and impose their views on more moderate shareholders through voting. Second, prices and welfare can move in opposite directions, which suggests that the former is an invalid proxy for the latter. Third, delegation of the decision to a board of directors may strictly improve shareholder value. However, the optimal board is generally biased, should not be representative of current shareholders, and may not always garner voting support from the majority of shareholders.
    Keywords: corporate governance; Shareholder rights; Trading; voting
    JEL: D74 D82 D83 G34 K22
    Date: 2019–10
  15. By: Shouyong Shi (Pennsylvania State University)
    Abstract: Many markets feature sequentially mixed search (SMS), which has directed search in the first stage followed by noisy matching with multiple offers in the second stage. I construct a simple model of SMS, establish existence of a unique equilibrium, analyze how the two stages of SMS interact to affect quantities and price dispersion, and conduct comparative statics with respect to the meeting efficiency and the economic condition. By extending the model to endogenize search effort, I show that the equilibrium is not constrained socially efficient. Policies are introduced to restore efficiency and to manage aggregate demand and supply.
    Date: 2019
  16. By: Eric Kamwa (LC2S - Laboratoire caribéen de sciences sociales - CNRS - Centre National de la Recherche Scientifique - UA - Université des Antilles); Issofa Moyouwou (MASS - Université de Yaoundé I [Yaoundé], Université de Yaoundé I [Yaoundé])
    Abstract: A voting rule is said to be vulnerable to the truncation paradox if some voter may favor the election of a more preferable outcome by listing only part of his sincere ranking on the competing candidates than listing his entire preference ranking on all the competing candidates (Brams, 1982, Fishburn and Brams, 1983). For three-candidate elections and for large electorates, this paper provides under the Impartial Anonymous Culture assumption (IAC), an evaluation of the likelihood of the truncation paradox the whole family of the scoring rules and runoff scoring rules.
    Date: 2020
  17. By: Atayev, Atabek; Janssen, Maarten
    Abstract: Consumers can acquire information through their own search efforts or through their social network. Information diffusion via word-of-mouth communication leads to some consumers free-riding on their "friends" and less information acquisition via active search. Free-riding also has an important positive effect, however, in that consumers that do not actively search themselves are more likely to be able to compare prices before purchase, imposing competitive pressure on firms. We show how market prices depend on the characteristics of the network and on search cost. For example, if the search cost becomes small, price dispersion disappears, while the price level converges to the monopoly level, implying that expected prices are decreasing for small enough search cost. More connected societies have lower market prices, while price dispersion remains even in fully connected societies.
    Keywords: consumer search; Social Networks; Word-of-Mouth Communication
    JEL: D43 D83 D85
    Date: 2019–10

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