nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒03‒30
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Superstars in two-sided markets: exclusives or not? By Carroni, Elias; Madio, Leonardo; Shekhar, Shiva
  2. Keeping the Listener Engaged: a Dynamic Model of Bayesian Persuasion By Yeon-Koo Che; Kyungmin Kim; Konrad Mierendorff
  3. Manipulative Disclosure By Mezzetti, Claudio
  4. Asymmetric auctions with risk averse preferences By Sanyyam Khurana
  5. Mediation Design By Gottardi, Piero; Mezzetti, Claudio
  6. Leaping into the dark: A theory of policy gambles By Anand, Kartik; Gai, Prasanna; König, Philipp Johann
  7. Platform Competition with Multi-Homing on Both Sides: Subsidize or Not? By Yannis Bakos; Hanna Halaburda
  8. Search, Information, and Prices By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  9. It Ain’t Over Until It’s Over: English Auctions with Subsequent Negotiations By Onur A. Koska; Frank Stähler
  10. Costly pretrial agreements By Anderlini, Luca; Felli, Leonardo; Immordino, Giovanni
  11. Implementability of Honest Multi-Agent Sequential Decision-Making with Dynamic Population By Tao Zhang; Quanyan Zhu
  12. Heavy Tails Make Happy Buyers By Eric Bax
  13. On the Existence of Equilibrium in Bayesian Games Without Complementarities By Idione Meneghel; Rabee Tourky
  14. Menu Mechanisms By Andrew MACKENZIE; Yu ZHOU
  15. General Revealed Preference Tests of Weak Separability and Utility Maximization with Incomplete Adjustment By Hjertstrand, Per; Swofford, James L.; Whitney, Gerald A.
  16. A Model of Scientific Communication By Isaiah Andrews; Jesse M. Shapiro
  17. Stability in games with continua of equilibria By Sebastian Bervoets; Mathieu Faure
  18. "Mechanism Design with Blockchain Enforcement" By Hiroshi Matsushima; Shunya Noda
  19. A Dominant Strategy, Double Clock Auction with Estimation-Based Tatonnement By Loertscher, Simon; Mezzetti, Claudio
  20. A Model of Justification By Sarah Ridout
  21. A Model of Cryptocurrencies By Michael Sockin; Wei Xiong

  1. By: Carroni, Elias; Madio, Leonardo; Shekhar, Shiva
    Abstract: This article studies incentives for a premium provider (Superstar) to offer exclusive contracts to competing platforms mediating the interactions between consumers and firms. When platform competition is intense, more consumers affiliate with the platform favored by Superstar’s exclusive deal. This mechanism is self-reinforcing as more firms follow consumer decisions and some singlehome on the favored platform. Our model shows that the presence of indirect network externalities may overturn the common conclusion in the one-sided literature that exclusivity could be deemed as anti-competitive. Exclusivity can be welfare-enhancing and a vertical merger (platform-Superstar) may make non-exclusivity more likely than if the Superstar was independent.
    Keywords: exclusive contracts; platforms; two-sided markets; marquee player
    JEL: L13 L22 L86 K21
    Date: 2020–03
  2. By: Yeon-Koo Che; Kyungmin Kim; Konrad Mierendorff
    Abstract: We consider a dynamic model of Bayesian persuasion. Over time, a sender performs a series of experiments to persuade a receiver to take a desired action. Due to constraints on the information flow, the sender must take real time to persuade, and the receiver may stop listening and take a final action at any time. In addition, persuasion is costly for both players. To incentivize the receiver to listen, the sender must leave rents that compensate his listening costs, but neither player can commit to her/his future actions. Persuasion may totally collapse in Markov perfect equilibrium (MPE) of this game. However, for persuasion costs sufficiently small, a version of a folk theorem holds: outcomes that approximate Kamenica and Gentzkow (2011)'s sender-optimal persuasion as well as full revelation (which is most preferred by the receiver) and everything in between are obtained in MPE, as the cost vanishes.
    Date: 2020–03
  3. By: Mezzetti, Claudio (University of Queensland & University of Warwick)
    Abstract: This paper studies disclosure of verifiable information by a privately informed expert. It shows that if the direction of the expert’s bias is uncertain, then a positive measure of expert types manipulate the decision maker fully, inducing her to choose their ideal outcome. Most other types manipulate partially. The decision maker obtains her first best outcome only if the expert is unbiased or the state of the world is a boundary point of the state space and the expert prefers a more extreme outcome. Experts benefit from being poker faced and the decision maker’s lack of familiarity with the problem.
    Keywords: Verifiable disclosure of information ; experts and decision makers ; manipulation ; pooling ; senders and receivers ; skepticism ; uncertain bias ; unravelling JEL codes: D44 ; D82
    Date: 2020
  4. By: Sanyyam Khurana (Department of Economics, Delhi School of Economics)
    Abstract: In this paper, we characterize all the Bayesian equilibria of a firstprice auction for asymmetric bidders with risk averse preferences. The necessary conditions for an equilibrium are pure strategy, continuity and strict monotonicity. Next, we show that first-order stochastic dominance is a necessary condition and conditional stochastic dominance is a sufficient condition to unambiguously rank the bidding strategies. We establish bidders’ preferences for the first-price and the second-price auction under different types of risk aversion. Finally, for a special family of utility functions and distribution functions, we study the impact of asymmetry on seller’s revenue in a first-price auction.
    JEL: D44 D82
    Date: 2020–02
  5. By: Gottardi, Piero (University of Essex); Mezzetti, Claudio (University of Queensland & University of Warwick)
    Abstract: We propose a mechanism design approach to study the role of a mediator in dispute resolution and bargaining. The mediator provides a buyer and a seller with “reality checks” by controlling the information each party has about her own value for a transaction, and proposes a price at which trade can occur if parties agree. We first consider the class of static information disclosure and trading mechanisms, in which the mediator simultaneously selects the information disclosed to the parties and posts the price at which they can trade. We characterize the mechanism that maximizes the ex-ante gains from trade. We show it is optimal to restrict agents’ information, as this allows to increase the volume of trade and complete some of the most valuable trades that are lost in the welfare maximizing mechanism under full information. We then study the value of the mediator engaging in “shuttle diplomacy” by considering a class of dynamic information disclosure and trading mechanisms, and show that it is possible to design a dynamic mechanism that achieves ex-post efficiency. Shuttle diplomacy facilitates trade by allowing the mediator to condition information releases and prices posted on the history of feedbacks she receives from the parties during her meetings with them.
    Keywords: Bargaining ; Information design ; Mechanism Design ; Mediation ; Persuasion JEL codes: C72 ; D47 ; D82 ; D86
    Date: 2020
  6. By: Anand, Kartik; Gai, Prasanna; König, Philipp Johann
    Abstract: Why do politicians sometimes pursue policies with uncertain outcomes? We present a model in which politicians are unable to pre-commit to a status quo policy, and where investors and voters face a conflict over the division of output. Politicians may deviate from the status quo and pursue risky policy gambles in order to raise aggregate output to satisfy voters. These policy gambles may have a "populist" and self-fulfilling flavour: they can command electoral support despite being against voters' best interests. We analyse how consensus-building institutions eliminate the gamble equilibrium and enhance voter welfare. We interpret the United Kingdom's decision to leave the European Union through the lens of the model.
    Keywords: policy gambles,policy uncertainty,multiple equilibria,economic populism,Brexit
    JEL: D72 D78 P16
    Date: 2020
  7. By: Yannis Bakos; Hanna Halaburda
    Abstract: A major result in the study of two-sided platforms is the strategic interdependence between the two sides of the same platform, leading to the implication that a platform can maximize its total profits by subsidizing one of its sides. We show that this result largely depends on assuming that at least one side of the market single-homes. As technology makes joining multiple platforms easier, we increasingly observe that participants on both sides of two-sided platforms multi-home. The case of multi-homing on both sides is mostly ignored in the literature on competition between two-sided platforms. We help fill this gap by developing a model for platform competition in a differentiated setting (a Hoteling line), which is similar to other models in the literature but focuses on the case where at least some agents on each side multi-home. We show that when both sides in a platform market multi-home, the strategic interdependence between the two sides of the same platform will diminish or even disappear. Our analysis suggests that the common strategic advice to subsidize one side in order to maximize total profits may be limited or even incorrect when both sides multi-home, which is an important caveat given the increasing prevalence of multi-homing in platform markets.
    Keywords: multi-homing, platforms, two-sided platforms, network effects, platform subsidies
    JEL: O33 L11
    Date: 2020
  8. By: Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, University of Chicago); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: Consider a market with many identical ï¬ rms offering a homogeneous good. A consumer obtains price quotes from a subset of ï¬ rms and buys from the ï¬ rm offering the lowest price. The “price count†is the number of ï¬ rms from which the consumer obtains a quote. For any given ex ante distribution of the price count, we obtain a tight upper bound (under ï¬ rst-order stochastic dominance) on the equilibrium distribution of sale prices. The bound holds across all models of ï¬ rms’ common-prior higher-order beliefs about the price count, including the extreme cases of complete information ( ï¬ rms know the price count exactly) and no information ( ï¬ rms only know the ex ante distribution of the price count). A qualitative implication of our results is that even a small ex ante probability that the price count is one can lead to dramatic increases in the expected price. The bound also applies in a wide class of models where the price count distribution is endogenized, including models of simultaneous and sequential consumer search.
    Keywords: Search, Price Competition, Bertrand Competition, "Law of One Price", Price Count, Price Quote, Information Structure, Bayes Correlated Equilibrium
    JEL: D41 D42 D43 D83
    Date: 2020–03
  9. By: Onur A. Koska (University of Canterbury); Frank Stähler
    Abstract: We consider a standard private value ascending-bid auction and show that subsequent negotiations make a seller worse off. The reason is that the seller’s optimal strategy does not change if she can make a take-it-or-leave-it offer to the highest bidder after the auction. Consequently, her expected revenues do not increase with subsequent negotiations, but decrease if the highest bidder has some bargaining power.
    Keywords: English auction; negotiations; reserve prices
    JEL: D44
    Date: 2020–03–01
  10. By: Anderlini, Luca; Felli, Leonardo; Immordino, Giovanni
    Abstract: Settling a legal dispute involves some costs that the parties have to incur ex ante for the pretrial negotiation and possible agreement to become feasible. Even in a full-information world, if the distribution of these costs is sufficiently mismatched with the distribution of the parties’ bargaining powers, a pretrial agreement may never be reached even though litigation is overall wasteful. Our results shed light on two key issues. First, a plaintiff may initiate a lawsuit even though the parties fully anticipate that it will be settled out of court. Second, the likelihood that a given lawsuit goes to trial is unaffected by how trial costs are distributed among the litigants. The choice of fee-shifting rule can affect only whether the plaintiff files a lawsuit in the first place. It does not affect whether it is settled before trial or litigated.
    Keywords: Pretrial Agreements; Costly Negotiations; Court Litigation
    JEL: C79 D23 D86 K12 K13
    Date: 2019–01–01
  11. By: Tao Zhang; Quanyan Zhu
    Abstract: We study the design of decision-making mechanism for resource allocations over a multi-agent system in a dynamic environment. Agents' privately observed preference over resources evolves over time and the population is dynamic due to the adoption of stopping rules. The proposed model designs the rules of encounter for agents participating in the dynamic mechanism by specifying an allocation rule and three payment rules to elicit agents' coupled decision makings of honest preference reporting and optimal stopping over multiple periods. The mechanism provides a special posted-price payment rule that depends only on each agent's realized stopping time to directly influence the population dynamics. This letter focuses on the theoretical implementability of the rules in perfect Bayesian Nash equilibrium and characterizes necessary and sufficient conditions to guarantee agents' honest equilibrium behaviors over periods. We provide the design principles to construct the payments in terms of the allocation rules and identify the restrictions of the designer's ability to influence the population dynamics. The established conditions make the designer's problem of finding multiple rules to determine an optimal allocation rule.
    Date: 2020–03
  12. By: Eric Bax
    Abstract: In a second-price auction with i.i.d. (independent identically distributed) bidder valuations, adding bidders increases expected buyer surplus if the distribution of valuations has a sufficiently heavy right tail. While this does not imply that a bidder in an auction should prefer for more bidders to join the auction, it does imply that a bidder should prefer it in exchange for the bidder being allowed to participate in more auctions. Also, for a heavy-tailed valuation distribution, marginal expected seller revenue per added bidder remains strong even when there are already many bidders.
    Date: 2020–02
  13. By: Idione Meneghel (Australian National University College of Business and Economics); Rabee Tourky (Australian National University College of Business and Economics)
    Abstract: This paper presents new results on the existence of pure-strategy Bayesian equilibria in specified functional forms. These results broaden the scope of methods developed by Reny (2011) well beyond monotone pure strategies. Applications include natural models of first-price and all-pay auctions not covered by previous existence results. To illustrate the scope of our results, we provide an analysis of three auctions: (i) a first-price auction of objects that are heterogeneous and imperfect substitutes; (ii) a first-price auction in which bidders’ payoffs have a very general interdependence structure; and (iii) an all-pay auction with non-monotone equilibrium.
    Keywords: Bayesian games, Monotone strategies, Pure-strategy equilibrium, Auctions
    JEL: C72 D44
    Date: 2019–08
  14. By: Andrew MACKENZIE; Yu ZHOU
    Abstract: We investigate menu mechanisms: dynamic mechanisms where at each history, an agent selects from a menu of his possible assignments. In comparison to direct mechanisms, menu mechanisms offer better privacy to participants; we formalize this with a novel notion of mechanism informativeness. We consider both ex-post implementation and full implementation, for both subgame perfection and a strengthening of dominance that covers off-path histories, and provide conditions under which menu mechanisms provide these implementations of rules. Our results cover a variety of environments, including elections, marriage, college admissions, auctions, labor markets, matching with contracts, and object allocation.
    Keywords: menu mechanism, privacy, strategy-proofness, robust implementation
    JEL: D82 D47 C78
    Date: 2020–03
  15. By: Hjertstrand, Per (Research Institute of Industrial Economics (IFN)); Swofford, James L. (Department of Economics and Finance); Whitney, Gerald A. (Department of Economics and Finance)
    Abstract: We propose more general non-parametric revealed preference tests for weak separability and utility maximization with incomplete adjustment. Hence, these procedures account for a decision maker’s inability to adjust his optimal allocation of the demanded goods and assets. Incomplete adjustment is especially important when modelling preferences of durable goods and assets. The procedures are based on a computationally attractive integer programming approach. Two empirical applications show that it is important to account for incomplete adjustment in consumer demand models of durable consumption goods and monetary assets.
    Keywords: Aggregation; Incomplete Adjustment; Revealed Preference; Weak Separability
    JEL: C14 C60 D01 D10 E40
    Date: 2020–03–25
  16. By: Isaiah Andrews; Jesse M. Shapiro
    Abstract: We propose a model of empirical science in which an analyst makes a report to an audience after observing some data. Agents in the audience may differ in their beliefs or objectives, and may therefore update or act differently following a given report. We contrast the proposed model with a classical model of statistics in which the estimate directly determines the payoff. We identify settings in which the proposed model prescribes very different, and more realistic, optimal rules.
    JEL: C18
    Date: 2020–03
  17. By: Sebastian Bervoets (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Mathieu Faure (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The stability of Nash equilibria has often been studied by examining the asymptotic behavior of the best-response dynamics. This is generally done in games where interactions are global and equilibria are isolated. In this paper, we analyze stability in contexts where interactions are local and where there are continua of equilibria. We focus on the public good game played on a network, where the set of equilibria is known to depend on the network structure (Bramoullé and Kranton, 2007), and where, as we show, continua of equilibria often appear. We provide necessary and sufficient conditions for a component of Nash equilibria to be asymptotically stable vis-à-vis the best-response dynamics. Interestingly, we demonstrate that these conditions relate to the structure of the network in a simple way. We also provide corresponding results for several dynamical systems related to the best response.
    Keywords: Best-response dynamics,Public good games,Stability
    Date: 2019–01
  18. By: Hiroshi Matsushima (Faculty of Economics, The University of Tokyo); Shunya Noda (Faculty of Economics, The University of Tokyo)
    Abstract: We study the design of self-enforcing mechanisms that rely on neither a trusted third party (e.g., court, trusted mechanism designer) nor a long-term relationship. Instead, we use a smart contract written on blockchains as a commitment device. We design the digital court, a smart contract that identifies and punishes agents who reneged on the agreement. The digital court substitutes the role of legal enforcement in the traditional mechanism design paradigm. We show that, any agreement that is implementable with legal enforcement can also be implemented with enforcement by the digital court. To pursue a desirable design of the digital court, we study a way to leverage truthful reports made by a small fraction of behavioral agents. Our digital court has a unique equilibrium as long as there is a positive fraction of behavioral agents, and it gives correct judgment in the equilibrium if honest agents are more likely to exist than dishonest agents. The platform for smart contracts is already ready in 2020; thus, self-enforcing mechanisms proposed in this paper can be used practically, even now. As our digital court can be used for implementing general agreements, it does not leak the detailed information about the agreement even if it is deployed on a public blockchain (e.g., Ethereum) as a smart contract.
  19. By: Loertscher, Simon; Mezzetti, Claudio (University of Queensland & University of Warwick)
    Abstract: The price mechanism is fundamental to economics but difficult to reconcile with incentive compatibility and individual rationality. We introduce a double clock auction for a homogeneous good market with multi-dimensional private information and multi-unit traders that is deficit-free, ex post individually rational, constrained efficient, and makes sincere bidding a dominant strategy equilibrium. Under a weak dependence and an identifiability condition, our double clock auction is also asymptotically efficient. Asymptotic efficiency is achieved by estimating demand and supply using information from the bids of traders that have dropped out and following a tatonnement process that adjusts the clock prices based on the estimates.
    Keywords: Deficit free ; dominant strategy mechanisms ; double clock auctions ; individual rationality ; multi-dimensional types ; privacy preservation ; reserve prices ; VCG mechanism JEL codes: C72 ; D44 ; D47 ; D82
    Date: 2020
  20. By: Sarah Ridout
    Abstract: I consider decision-making constrained by considerations of morality, rationality, or other virtues. The decision maker (DM) has a true preference over outcomes, but feels compelled to choose among outcomes that are top-ranked by some preference that he considers "justifiable." This model unites a broad class of empirical work on distributional preferences, charitable donations, prejudice/discrimination, and corruption/bribery. I provide a behavioral characterization of the model. I also show that the set of justifications can be identified from choice behavior when the true preference is known, and that choice behavior substantially restricts both the true preference and justifications when neither is known. I argue that the justifiability model represents an advancement over existing models of rationalization because the structure it places on possible "rationales" improves tractability, interpretation and identification.
    Date: 2020–03
  21. By: Michael Sockin; Wei Xiong
    Abstract: We model a cryptocurrency as membership in a decentralized digital platform developed to facilitate transactions between users of certain goods or services. The rigidity induced by the cryptocurrency price having to clear membership demand with supply of token by speculators, especially with strong complementarity in membership demand, can lead to market breakdown. While user optimism mitigates the market fragility by increasing user participation, speculator sentiment exacerbates it by crowding users out. Informational frictions attenuate the risk of breakdown by dampening price volatility and platform performance. Furthermore, the users' anticipation of losses from strategic attacks by miners exacerbates the market fragility.
    JEL: G19
    Date: 2020–03

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