nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒05‒04
ten papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Manufacturer Cartels and Resale Price Maintenance By Matthias Hunold; Johannes Muthers
  2. Ambiguity and awareness: a coherent multiple priors model. * By Simon Grant; Ani Guerdjikova; John Quiggin
  3. Public and private incentives for self-protection By Treich, Nicolas; Salanié, François
  4. All symmetric equilibria in differential games with public goods By Niko Jaakkola; Florian Wagener
  5. Black-Box Strategies and Equilibrium for Games with Cumulative Prospect Theoretic Players By Soham R. Phade; Venkat Anantharam
  6. Attention to online sales: The role of brand image concerns By Dertwinkel-Kalt, Markus; Köster, Mats
  7. Social Influence in Committee Deliberation By Chaim Fershtman; Uzi Segal
  8. How noise affects effort in tournaments By Mikhail Drugov; Dmitry Ryvkin
  9. Migration between Platforms By Gary Biglaiser; Jacques Crémer; André Veiga
  10. Stochastic representation decision theory: How probabilities and values are entangled dual characteristics in cognitive processes By Giuseppe Ferro; Didier Sornette

  1. By: Matthias Hunold; Johannes Muthers
    Abstract: We provide a theory of how RPM facilitate upstream cartels absent any information asymmetries using a model with manufacturer and retailer competition. Because retailers have an effective outside option to each manufacturer’s contract, the manufacturers can only ensure contract acceptance by leaving a sufficient margin to the retailers. This restricts the wholesale price level even when manufacturers collude. In this context, resale price maintenance may only be profitable for the manufacturers if they collude. We thus provide a novel theory of harm for resale price maintenance when manufacturers collude and illustrate the fit of this theory in various competition policy cases.
    Keywords: resale price maintenance, collusion, retailing.
    JEL: L41 L42 L81
    Date: 2020–03
  2. By: Simon Grant (AUTRES, Australia's national university); Ani Guerdjikova (GAEL - Laboratoire d'Economie Appliquée de Grenoble - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - CNRS - Centre National de la Recherche Scientifique - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology, UGA - Université Grenoble Alpes, IUF - Institut Universitaire de France - M.E.N.E.S.R. - Ministère de l'Education nationale, de l’Enseignement supérieur et de la Recherche, CNRS - Centre National de la Recherche Scientifique, INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology); John Quiggin (University of Queensland [Brisbane])
    Abstract: Ambiguity in the ordinary language sense means that available information is open to multiple interpretations. We model this by assuming that individuals are unaware of some possibilities relevant to the outcome of their decisions and that multiple probabilities may arise over an individual's subjective state space depending on which of these possibilities are realized. We formalize a notion of coherent multiple priors and derive a representation result that with full awareness corresponds to the usual unique (Bayesian) prior but with less than full awareness generates multiple priors. When information is received with no change in awareness, each element of the set of priors is updated in the standard Bayesian fashion (that is, full Bayesian updating). An increase in awareness, however, leads to an expansion of the individual's subjective state and (in general) a contraction in the set of priors under consideration. Keywords ambiguity, unawareness, multiple priors. JEL Classification: D81 * We thank Adam Dominiak, Peter Klibanoff, Sujoy Mukerji, Klaus Nehring, and participants at RUD2019 and at the economics seminar at UGA. We are also especially grateful to the guest editor and two anonymous referees for their patience and perseverance in reviewing earlier versions and providing us with many useful comments and suggestions that have considerably improved the clarity of our exposition.
    Keywords: ambiguity,unawareness,multiple priors,updating,latent variables,missing variables,RCT
    Date: 2020–04–17
  3. By: Treich, Nicolas; Salanié, François
    Abstract: Governments sometimes encourage or impose individual self-protection measures, such as wearing a protective mask when going outside during an epidemic. However, by reducing the risk of being infected by others, more self-protection may lead each individual to go outside more often. In the absence of lockdown, this creates a “collective offsetting effect”, since more people outside means that the risk of infection is increased for all. Yet, wearing masks also creates a positive externality on others, by reducing the risk of infecting them. We show how to integrate these different effects in a simple model, and we discuss when self-protection efforts should be encouraged (or deterred) by a social planner.
    Date: 2020–04
  4. By: Niko Jaakkola (University of Bologna); Florian Wagener (University of Amsterdam)
    Abstract: We characterise the entire set of symmetric stationary Markov-perfect Nash equilibria (MPE) in a differential game of public good investment, using the canonical problem of climate change as an example. We provide a sufficient and necessary condition for MPE and show how the entire set of MPE is constructed. The equilibrium in continuous strategies, unique in our context, is Pareto-dominated by any other equilibrium. If a Pareto- undominated steady state exists, it is sustained by trigger-like strategies, with deviations above and below the steady state leading to different re- sponses. We extend the theory of differential games to deal with payoffs under discontinuous strategies. Our methods work under general functional forms.
    JEL: C73 Q54
    Date: 2020–04–20
  5. By: Soham R. Phade; Venkat Anantharam
    Abstract: The betweenness property of preference relations states that a probability mixture of two lotteries should lie between them in preference. It is a weakened form of the independence property and hence satisfied in expected utility theory (EUT). Experimental violations of betweenness are well-documented and several preference theories, notably cumulative prospect theory (CPT), do not satisfy betweenness. We prove that CPT preferences satisfy betweenness if and only if they conform with EUT preferences. In game theory, lack of betweenness in the players' preference relations makes it essential to distinguish between the two interpretations of a mixed action by a player - conscious randomizations by the player and the uncertainty in the beliefs of the opponents. We elaborate on this distinction and study its implication for the definition of Nash equilibrium. This results in four different notions of equilibrium, with pure and mixed action Nash equilibrium being two of them. We dub the other two pure and mixed black-box strategy Nash equilibrium respectively. We resolve the issue of existence of such equilibria and examine how these different notions of equilibrium compare with each other.
    Date: 2020–04
  6. By: Dertwinkel-Kalt, Markus; Köster, Mats
    Abstract: We provide a novel intuition for why manufacturers restrict their retailers' ability to resell brandproducts online. Our approach builds on models of limited attention according to which pricedisparities across distribution channels guide a consumer's attention toward prices and lower herappreciation for quality. Thus, absent vertical restraints, one out of two distortions - a quality ora participation distortion - can arise in equilibrium. We show that, by ruling out both distortions,vertical restraints can be socially desirable, but can also hurt consumers through higher retail prices.Thereby, we identify a novel trade-off between efficiency and consumer surplus.
    Keywords: Limited Attention,Online Sales,Antitrust,Vertical Restraints
    JEL: D21 K21 L42
    Date: 2020
  7. By: Chaim Fershtman (Tel Aviv University); Uzi Segal (Boston College)
    Abstract: Committee protocols typically involve deliberations in which committee members try to influence and convince each other regarding the “right” choice. Such deliberations do not involve only information exchange, but their aim is also to affect the preferences and the votes of other members. This aspect of social influence and committee deliberation is the focus of this paper. Using a model of social influence we demonstrate how deliberation procedures affect the voting outcome and how different protocols of consultation by committees’ chairs may affect the chairs’ final decisions. We then analyze the ability of a “designer” to control the deliberation protocol and to manipulate the deliberation procedure to increase the probability that the outcome he favors will be selected.
    Keywords: Committee, social influence, deliberation
    JEL: D71
    Date: 2020–04–27
  8. By: Mikhail Drugov (New Economic School and CEPR); Dmitry Ryvkin (Department of Economics, Florida State University)
    Abstract: It is commonly understood that making a tournament ranking process more noisy leads to a reduction in effort exerted by players in the tournament. But what exactly does it mean to have \more noise?" We address this question and show that the level of risk, as measured by the variance or the second-order stochastic dominance order, is not the answer, in general. For rank-order tournaments with arbitrary prizes, equilibrium effort decreases as noise becomes more dispersed, in the sense of the dispersive order. For winner-take-all tournaments, we identify a weaker version of the dispersive order we call quantile stochastic dominance, as well as other orders and entropy measures linking equilibrium effort and noise.
    Keywords: ttournament, noise, dispersive order, quantile stochastic dominance, entropy.
    JEL: C72 D72 D82
    Date: 2020–02–17
  9. By: Gary Biglaiser; Jacques Crémer; André Veiga
    Abstract: We study incumbency advantage in markets with positive consumption externalities. Users of an incumbent platform receive stochastic opportunities to migrate to an entrant. They can accept a migration opportunity or wait for a future opportunity. In some circumstances, users have incentives to delay migration until others have migrated. If they all do so, no migration takes place, even when migration would have been Pareto-superior. This provides an endogenous micro-foundation for incumbency advantage. We use our framework to identify environments where incumbency advantage is larger.
    Keywords: platform migration, standardization and compatibility, industry dynamics
    JEL: D85 L14 R23 L15 L16
    Date: 2020
  10. By: Giuseppe Ferro (ETH Zürich - Department of Management, Technology, and Economics (D-MTEC)); Didier Sornette (ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute)
    Abstract: Humans are notoriously bad at understanding probabilities, exhibiting a host of biases and distortions that are context dependent. This has serious consequences on how we assess risks and make decisions. Several theories have been developed to replace the normative rational expectation theory at the foundation of economics. These approaches essentially assume that (subjective) probabilities weight multiplicatively the utilities of the alternatives offered to the decision maker, although evidence suggest that probability weights and utilities are often not separable in the mind of the decision maker. In this context, we introduce a simple and efficient framework on how to describe the inherently probabilistic human decision-making process, based on a representation of the deliberation activity leading to a choice through stochastic processes, the simplest of which is a random walk. Our model leads naturally to the hypothesis that probabilities and utilities are entangled dual characteristics of the real human decision making process. It derives two previously postulated features of prospect theory (Kahneman and Tversky, 1979): the inverse S-shaped subjective probability as a function of the objective probability and risk-seeking behaviour in the loss domain. It also predicts observed violations of stochastic dominance (Birnbaum and Navarrete, 1998) while it does not when the dominance is “evident”. Our theory, which offers many more predictions for future tests, has strong implications for psychology, economics and artificial intelligence.
    Keywords: stochastic decision theory, duality of probability and value, subjective probability, risk-seeking behaviour, stochastic dominance
    JEL: A12 C44 D81
    Date: 2020–04

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