nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒12‒23
nine papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Third-degree Price Discrimination Versus Uniform Pricing By Dirk Bergemann; Francisco Castro; Gabriel Weintraub
  2. Bitcoin: An Impossibility Theorem for Proof-of-Work based Protocols By Jacob Leshno; Philipp Strack
  3. Competitive Imperfect Price Discrimination and Market Power By Paul Belleflamme; Wing Man Wynne Lam; Wouter Vergote
  4. The Curse of Knowledge: Having Access to Customer Information Can be Detrimental to Monopoly’s Profit By Laussel, Didier; Long, Ngo Van; Resende, Joana
  5. A general model of price competition with soft capacity constraints By Marie-Laure Cabon-Dhersin; Nicolas Drouhin
  6. Sequential ε-Contamination with Learning By Hiroyuki Kato; Kiyohiko G. Nishimura; Hiroyuki Ozaki
  7. Free Entry under Common Ownership By Sato, Susumu; Matsumura, Toshihiro
  8. Optimal Learning, Overvaluation and Overinvestment By Barbosa, António
  9. Campaign Contests By Denter, Philipp

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Francisco Castro (Anderson School of Management, UCLA); Gabriel Weintraub (Graduate School of Business, Stanford University)
    Abstract: We compare the revenue of the optimal third-degree price discrimination policy against a uniform pricing policy. A uniform pricing policy offers the same price to all segments of the market. Our main result establishes that for a broad class of third-degree price discrimination problems with concave revenue functions and common support, a uniform price is guaranteed to achieve one half of the optimal monopoly proï¬ ts. This revenue bound obtains for any arbitrary number of segments and prices that the seller would use in case he would engage in third-degree price discrimination. We further establish that these conditions are tight, and that a weakening of common support or concavity leads to arbitrarily poor revenue comparisons.
    Keywords: First Degree Price Discrimination, Third Degree Price Discrimination, Uniform Price, Approximation, Concave Demand Function, Market Segmentation
    JEL: C72 D82 D83
    Date: 2019–12
  2. By: Jacob Leshno (University of Chicago Booth School of Business); Philipp Strack (Cowles Foundation, Yale University)
    Abstract: Bitcoin's main innovation lies in allowing a decentralized system that relies on anonymous, profit driven miners who can freely join the system. We formalize these properties in three axioms: anonymity of miners, no incentives for miners to consolidate, and no incentive to assuming multiple fake identities. This novel axiomatic formalization allows us to characterize which other protocols are feasible: Every protocol with these properties must have the same reward scheme as Bitcoin. This implies an impossibility result for risk-averse miners: no protocol satisfies the aforementioned constraints simultaneously without giving miners a strict incentive to merge. Furthermore, any protocol either gives up on some degree of decentralization or its reward scheme is equivalent to Bitcoin's.
    Keywords: Bitcoin, Random Selection, Proportional Selection Rule, Impossibility Theorem
    JEL: C72 D02 D47
    Date: 2019–10
  3. By: Paul Belleflamme; Wing Man Wynne Lam; Wouter Vergote
    Abstract: Two duopolists compete in price on the market for a homogeneous product. They can ‘profile’ consumers, i.e., identify their valuations with some probability. If both firms can profile consumers but with different abilities, then they achieve positive expected profits at equilibrium. This provides a rationale for firms to (partially and unequally) share data about consumers, or for data brokers to sell different customer analytics to competing firms. Consumers prefer that both firms profile exactly the same set of consumers, or that only one firm profiles consumers, as this entails marginal cost pricing (so does a policy requiring list prices to be public). Otherwise, more protective privacy regulations have ambiguous effects on consumer surplus.
    Keywords: price discrimination, price dispersion, Bertrand competition, privacy, big data
    JEL: D11 D18 L12 L86
    Date: 2019
  4. By: Laussel, Didier; Long, Ngo Van; Resende, Joana
    Abstract: We show that a monopolist's profit is higher if he refrains from collecting coarse information on his customers, sticking to constant uniform pricing rather than recognizing customers' segments through their purchase history. In the Markov-perfect equilibrium with coarse information collection, after each commitment period, a new introductory price is offered to attract new customers, creating a new market segment for price discrimination. Eventually, the whole market is covered. Shortening the commitment period results in lower profits. These results sharply differ from the ones obtained when the firm can uncover the exact willingness-to-pay of each previous customer.
    Keywords: curse of knowledge, customers information, intertemporal price discrimination, Coase conjecture, price personalization
    JEL: L12 L15
    Date: 2019–12
  5. By: Marie-Laure Cabon-Dhersin (CREAM - Centre de Recherche en Economie Appliquée à la Mondialisation - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université - IRIHS - Institut de Recherche Interdisciplinaire Homme et Société - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université); Nicolas Drouhin (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We propose a general model of oligopoly with firms relying on a two factor production function. In a first stage, firms choose a certain fixed factor level (capacity). In the second stage, firms compete on price, and adjust the variable factor to satisfy all the demand. When the factors are substitutable, the capacity constraint is " soft " , implying a convex cost function in the second stage. We show that there is a unique equilibrium prediction in pure strategies, whatever the returns to scale, characterized by a price that increases with the number of firms up to a threshold. The main propositions are established under the general assumption that the production function is quasi-concave but the paper provides a general methodology allowing the model to be solved numerically for special parametrical forms.
    Keywords: limit pricing strategy,capacity con- straint,price competition,tacit collusion,convex cost,returns to scale,capacity con-straint
    Date: 2019
  6. By: Hiroyuki Kato (Department of Management and Economics, Kaetsu University); Kiyohiko G. Nishimura (National Graduate Institute for Policy Studies (GRIPS) and CARF, University of Tokyo); Hiroyuki Ozaki (Faculty of Economics, Keio University)
    Abstract: The ε-contamination has been studied extensively as a convenient and operational specification of Knightian uncertainty. However, it is formulated in a static, one-shot economic environment. This paper extends this concept into a dynamic and sequential framework, allowing learning and guaranteeing time consistency of intertemporal decision. We develop the theory of the rectangular ε-contamination, which can be represented by a sequence of ε's that "contaminates" the conditional principal probability measure. We then compare this sequential (thus closed-loop) rectangular ε-contamination with the initial-period one-shot (thus open-loop) ε-contamination, which is a straightforward extension of the static ε-contamination.
    Date: 2019–12
  7. By: Sato, Susumu; Matsumura, Toshihiro
    Abstract: This study investigates the equilibrium and welfare properties of free entry under common ownership. We formulate a model in which incumbents under common ownership choose whether to enter a new market. We find that an increase in common ownership reduces entries, which may or may not improve welfare. Welfare has an inverted-U shaped relationship with the degree of common ownership. However, if firms do not have common ownership before the entry, after entry common ownership harms welfare.
    Keywords: Overlapping ownership; Free entry, Insufficient entry, Excessive entry, Circular markets
    JEL: L13 L22
    Date: 2019–12–11
  8. By: Barbosa, António
    Abstract: Periods of technological revolution are usually associated with overvaluation of and overinvestment by innovating firms. This paper develops a model that explains this behavior in a frictionless rational setting. When fully rational innovating firms face uncertainty about the returns to scale of their production functions, overinvestment emerges as the optimal way to learn about the returns to scale. The optimal learning is also shown to produce overvaluation. The model is also able to generate what an observer ex-post would identify as bubbles followed by overcorrection, negative excess returns in early periods, negative autocorrelation in excess returns and market-to-book and size effects.
    Keywords: Learning, Investment Decision, Bubbles
    JEL: D83 G12 G14
    Date: 2019–09
  9. By: Denter, Philipp
    Abstract: I develop a formal model of political campaigns in which candidates choose how to distribute their resources over two different policy issues. I assume that campaigning on an issue has two simultaneous effects, both rooted in social and cognitive psychology: It increases the perceived quality of the advertising candidate in that issue and it makes the issue more salient, thereby increasing the issue's perceived importance to the voters. Whether a candidate can increase his vote share during the contest depends on the interplay of strategic issue selection, which depends on candidates' comparative advantages, and the aggregate resource allocation to the issues. The aggregate resource allocation-or campaign agenda-depends on an issue's importance, the firmness of voters' conviction regarding candidates' relative quality, and the divisiveness of this issue. A candidate increases his vote share during the campaign contest if he has a comparative advantage on the issue that receives more aggregate spending. Consequently, the contest may be biased in one candidate's favor and an a priori less popular candidate might be the actual odds on favorite. I show that a relatively unimportant issue might receive most aggregate spending and thus could decide the election.
    Keywords: electoral competition, campaign spending, contests, priming, advertising
    JEL: D72 L2 P16
    Date: 2019–08

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