nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒04‒20
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. A Simple Model of Competitive Testing By Ginzburg, Boris
  2. Auctions vs. negotiations in vertically related markets By Emanuele Bacchiega; Olivier Bonroy; Emmanuel Petrakis
  3. Reselling Information By S. Nageeb Ali; Ayal Chen-Zion; Erik Lillethun
  4. Credible, Truthful, and Bounded-Round Mechanisms via Cryptographic Commitments By Matheus V. X. Ferreira; S. Matthew Weinberg
  5. Final Topology for Preference Spaces By Pablo Schenone
  6. Strategic Bidding in Product-Mix, Sequential, and Simultaneous Auctions By Simon Finster
  7. LQG Information Design By Takashi Ui
  8. Incentive compatibility in sender-receiver stopping games By Aditya Aradhye; J\'anos Flesch; Mathias Staudigl; Dries Vermeulen
  9. On the Predictions of Cumulative Prospect Theory for Third and Fourth Order Preferences By Ivan Paya; David Peel; Konstantinos Georgalos
  10. Zero Pricing Platform Competition By Shekhar, Shiva
  11. On the Representativeness of Voter Turnout By Louis Kaplow; Scott Duke Kominers
  12. On the Structure of Stable Tournament Solutions By Felix Brandt; Markus Brill; Hans Georg Seedig; Warut Suksompong
  13. Optimal Taxation in Asset Markets with Adverse Selection By Seyed Mohammadreza Davoodalhosseini
  14. A Search Model of Statistical Discrimination By Jiadong Gu; Peter Norman
  15. Greater search cost reduces prices By Sander Heinsalu

  1. By: Ginzburg, Boris
    Abstract: A number of candidates are competing for a prize. Each candidate is privately informed about his type. The decision-maker who allocates the prize wants to give it to the candidate with the highest type. Each candidate can take a test that reveals his type at a cost. I show that an increase in competition increases information revelation when the cost is high, and reduces it when the cost is low. Nevertheless, the decision-maker always benefits from greater competition. Candidates can be better off if the cost is higher. Mandatory disclosure is Pareto-dominated by voluntary disclosure unless competition is low. Finally, when the test is noisier, candidates are more likely to take it.
    Keywords: information disclosure, testing, competition
    JEL: D82 D83
    Date: 2019–01–03
  2. By: Emanuele Bacchiega; Olivier Bonroy; Emmanuel Petrakis
    Abstract: In a two-tier industry with bottleneck upstream and two downstream firms producing vertically differentiated goods, we identify conditions under which the upstream supplier chooses exclusive or non-exclusive negotiations, or an English auction to sell its essential input. Auctioning off a two-part tariff contract is optimal for the supplier when its bar- gaining power is low and the final goods are not too differentiated. Otherwise, the supplier enters into exclusive or non-exclusive negotiations with the downstream firm(s). Finally, in contrast to previous findings, an auction is never welfare superior to negotiations.
    JEL: D43 L13 L14
    Date: 2020–04
  3. By: S. Nageeb Ali; Ayal Chen-Zion; Erik Lillethun
    Abstract: Information is replicable in that it can be simultaneously consumed and sold to others. We study how resale affects a decentralized market for information. We show that even if the initial seller is an informational monopolist, she captures non-trivial rents from at most a single buyer: her payoffs converge to 0 as soon as a single buyer has bought information. By contrast, if the seller can also sell valueless tokens, there exists a ``prepay equilibrium'' where payment is extracted from all buyers before the information good is released. By exploiting resale possibilities, this prepay equilibrium gives the seller as high a payoff as she would achieve if resale were prohibited.
    Date: 2020–04
  4. By: Matheus V. X. Ferreira; S. Matthew Weinberg
    Abstract: We consider the sale of a single item to multiple buyers by a revenue-maximizing seller. Recent work of Akbarpour and Li formalizes credibility as an auction desideratum, and prove that the only optimal, credible, strategyproof auction is the ascending price auction (Akbarpour and Li, 2019). In contrast, when buyers' valuations are MHR, we show that the mild additional assumption of a cryptographically secure commitment scheme suffices for a simple two-round auction which is optimal, credible, and strategyproof. We extend our analysis to the case when buyer valuations are $\alpha$-strongly regular for any $\alpha > 0$, up to arbitrary $\varepsilon$ in credibility. Interestingly, we also prove that this construction cannot be extended to regular distributions, nor can the $\varepsilon$ be removed with multiple bidders.
    Date: 2020–04
  5. By: Pablo Schenone
    Abstract: Most decision problems can be understood as a mapping from a preference space into a set of outcomes. When preferences are representable via utility functions, this generates a mapping from a space of utility functions into outcomes. We say a model is continuous in utilities (resp., preferences) if small perturbations of utility functions (resp., preferences) generate small changes in outcomes. While similar, these two concepts are equivalent only when the topology satisfies the following universal property: for each continuous mapping from preferences to outcomes there is a unique mapping from utilities to outcomes that is faithful to the preference map and is continuous. The topologies that satisfy such a universal property are called final topologies. In this paper, we analyze the properties of the final topology for preference sets. This is of practical importance since most of the analysis on continuity is done via utility functions and not the primitive preference space. Our results allow the researcher to extrapolate continuity in utility to continuity in the underlying preferences.
    Date: 2020–04
  6. By: Simon Finster (Nuffield College and Department of Economics, University of Oxford)
    Abstract: We study equilibria in Product-Mix, sequential, and simultaneous auctions, which are used to sell differentiated, indivisible goods. A flexible bidder with unit demand, interested in buying any of the goods, competes against several inflexible bidders, each interested in only one specific good. For first-price and second-price payments, we obtain theoretical results on equilibrium bidding, and compare efficiency, revenue, and bidder surplus numerically. Differences in outcomes between Product-Mix and sequential auctions are small for a range of value distributions. The simultaneous auction performs worst in all dimensions, and differences in performance vary substantially with the degree of competition the flexible bidder faces.
    Keywords: multi-unit auctions, asymmetric auctions, market power, menu auctions, sequential auctions, simultaneous auctions
    JEL: C72 D44 D47 D61 D82
    Date: 2020–03–24
  7. By: Takashi Ui (Hitotsubashi University)
    Abstract: A linear-quadratic-Gaussian (LQG) game is an incomplete information game with quadratic payoff functions and Gaussian information structures. It has many applications such as a Cournot game, a Bertrand game, a beauty contest game, and a network game among others. LQG information design is a problem to find an information structure from a given collection of feasible Gaussian information structures that maximizes a quadratic objective function when players follow a Bayes Nash equilibrium. This paper studies LQG information design by formulating it as semidefinite programming, which is a natural generalization of linear programming. Using the formulation, we provide sufficient conditions for optimality and suboptimality of no and full information disclosure. In the case of symmetric LQG games, we characterize the optimal symmetric information structure, and in the case of asymmetric LQG games, we characterize the optimal public information structure, each of which is in a closed-form expression.
    Keywords: incomplete information games, optimal information structures, information design, Bayesian persuasion.
    JEL: C72 D82
    Date: 2020–03
  8. By: Aditya Aradhye; J\'anos Flesch; Mathias Staudigl; Dries Vermeulen
    Abstract: We introduce a model of sender-receiver stopping games, where the state of the world follows an iid--process throughout the game. At each period, the sender observes the current state, and sends a message to the receiver, suggesting either to stop or to continue. The receiver, only seeing the message but not the state, decides either to stop the game, or to continue which takes the game to the next period. The payoff to each player is a function of the state when the receiver quits, with higher states leading to better payoffs. The horizon of the game can be finite or infinite. We prove existence and uniqueness of responsive (i.e. non-babbling) Perfect Bayesian Equilibrium (PBE) under mild conditions on the game primitives in the case where the players are sufficiently patient. The responsive PBE has a remarkably simple structure, which builds on the identification of an easy-to-implement and compute class of threshold strategies for the sender. With the help of these threshold strategies, we derive simple expressions describing this PBE. It turns out that in this PBE the receiver obediently follows the recommendations of the sender. Hence, surprisingly, the sender alone plays the decisive role, and regardless of the payoff function of the receiver the sender always obtains the best possible payoff for himself.
    Date: 2020–04
  9. By: Ivan Paya; David Peel; Konstantinos Georgalos
    Abstract: This is the first paper to provide a comprehensive theoretical analysis of the third and fourth order lottery preferences implied by cumulative prospect theory (CPT). We consider the lottery choices from three alternative reference points: the status quo, the expected payout and the MaxMin. We report a large number of new results given the standard assumptions about probability weighting. We demonstrate, for example, the general result that from the status quo reference point there is no third order reflection effect but there is a fourth order reflection effect. When the average payout or the MaxMin is the reference point, we lose generality but can demonstrate that representative individuals with power value functions can make prudent or imprudent, temperate or intemperate choices depending on the precise magnitude of lottery payoffs. In addition to this, we show that these representative CPT individuals can exhibit some surprising combinations of second with third and fourth order risk attitudes. Throughout the paper, we contrast our theoretical predictions with results reported in the literature and we are able to reconcile some conflicting evidence on higher order risk preferences.
    Keywords: cumulative prospect theory, decision making under risk, experiments, higher order preferences, reflection effect
    JEL: D8 E21
    Date: 2020
  10. By: Shekhar, Shiva
    Abstract: This article studies competition between different types of ad-funded platforms attracting consumers with free services. Consumers often find advertisements a nuisance on such platforms. We study how under a competitive setting platforms balance the tension between attracting consumers and rent extraction from the advertising side. We propose a flexible yet simple model that studies competition between standard platforms and social media platforms (with same-side network effects). We find that an increase in either positive same-side network effects or an increase in consumer disutility from advertisements leads to a reduction in the number of ads on that platform. When competing platforms merge, consumer side network effects do not impact prices and the number of ads is higher. In a setting where consumers present a negative (congestion) externality on each other, competition fails to protect consumer welfare and behaves erratically. Finally, we present a few extensions and discuss some policy implications.
    Keywords: Social media platforms, platforms, two-sided markets, same side network effects, cross side network effects, advertising.
    JEL: K21 L13 L82 L86
    Date: 2020–03
  11. By: Louis Kaplow; Scott Duke Kominers
    Abstract: Prominent theory research on voting uses models in which expected pivotality drives voters’ turnout decisions and hence determines voting outcomes. It is recognized, however, that such work is at odds with Downs’s paradox: in practice, many individuals turn out for reasons unrelated to pivotality, and their votes overwhelm the forces analyzed in pivotality-based models. Accordingly, we examine a complementary model of large- N elections at the opposite end of the spectrum, where pivotality effects vanish and turnout is driven entirely by individuals’ direct costs and benefits from the act of voting itself. Under certain conditions, the level of turnout is irrelevant to representativeness and thus to voting outcomes. Under others, however, “anything is possible”: starting with any given distribution of preferences in the underlying population, there can arise any other distribution of preferences in the turnout set and thus any outcome within the range of the voting mechanism. Particular skews in terms of representativeness are characterized. The introduction of noise in the relationship between underlying preferences and individuals’ direct costs and benefits from voting produces, in the limit, fully representative turnout. To illustrate the potential disconnect between the level of turnout (a focus of much empirical literature) and representativeness, we present a simple example in which, as noise increases, the turnout level monotonically falls yet representativeness monotonically rises.
    JEL: D71 D72
    Date: 2020–03
  12. By: Felix Brandt; Markus Brill; Hans Georg Seedig; Warut Suksompong
    Abstract: A fundamental property of choice functions is stability, which, loosely speaking, prescribes that choice sets are invariant under adding and removing unchosen alternatives. We provide several structural insights that improve our understanding of stable choice functions. In particular, (i) we show that every stable choice function is generated by a unique simple choice function, which never excludes more than one alternative, (ii) we completely characterize which simple choice functions give rise to stable choice functions, and (iii) we prove a strong relationship between stability and a new property of tournament solutions called local reversal symmetry. Based on these findings, we provide the first concrete tournament---consisting of 24 alternatives---in which the tournament equilibrium set fails to be stable. Furthermore, we prove that there is no more discriminating stable tournament solution than the bipartisan set and that the bipartisan set is the unique most discriminating tournament solution which satisfies standard properties proposed in the literature.
    Date: 2020–04
  13. By: Seyed Mohammadreza Davoodalhosseini
    Abstract: Constrained efficiency is characterized in an asset market, subject to search frictions, where sellers are privately informed about the type of their asset. The type determines the opportunity cost of the asset for sellers and the quality of the asset for buyers. The constrained efficient allocation can be implemented using a sales tax schedule. The role of these taxes is to redistribute resources between different types of sellers to relax incentive constraints. The optimal tax schedule strictly increases welfare compared with the laissez-faire equilibrium, can sometimes lead to an allocation that Pareto dominates the equilibrium, and can sometimes lead to the first-best allocation (i.e., taxation can correct all inefficiencies caused by adverse selection). The shape of the optimal tax schedule is also investigated. If the quality of assets for buyers is a monotonic function of the sellers' opportunity cost (e.g., more distressed sellers have lower-quality assets), the schedule requires that the trading of low-quality assets be subsidized and trading of high-quality assets be taxed, although the schedule is not necessarily monotone in the quality or price of the assets. Otherwise, trading of some low-quality assets may be taxed and trading of some high-quality assets may be subsidized.
    Keywords: Economic models; Financial markets; Financial system regulation and policies; Market structure and pricing
    JEL: D83 E24 G10 J64
    Date: 2020–04
  14. By: Jiadong Gu; Peter Norman
    Abstract: We consider a search model in which workers have heterogeneous skill levels and firms have heterogeneous skill requirements, and, critically, skills are not directly observable. There is also an observable, but payoff irrelevant group characteristic. The model admits symmetric equilibria in which the group characteristic is ignored, but also asymmetric equilibria in which a group is statistically discriminated against, even when symmetric equilibria are unique. Moreover, a robust possibility is that symmetric equilibria become unstable when the group characteristic is introduced.
    Date: 2020–04
  15. By: Sander Heinsalu
    Abstract: The optimal price of each firm falls in the search cost of consumers, in the limit to the monopoly price, despite the exit of lower-value consumers in response to costlier search. Exit means that fewer inframarginal consumers remain. The decrease in marginal buyers is smaller, because part of demand is composed of customers coming from rival firms. These buyers can be held up and are not marginal. Higher search cost reduces the fraction of incoming switchers among buyers, which decreases the hold-up motive, thus the price.
    Date: 2020–04

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