nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒09‒28
thirteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Patterns of competitive interaction By armstrong, Mark; Vickers, John
  2. Search, Information, and Prices By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  3. Two-Sided Platforms and Biases in Technology Adoption By Choi, Jay Pil; Jeon, Doh-Shin
  4. Creating platforms by hosting rivals By Andrei Hagiu; Bruno Jullien; Julian Wright
  5. Mechanism Design with Narratives By Matthias Lang
  6. Pricing Group Membership By Siddhartha Bandyopadhyay; Antonio Cabrales
  7. A Master of Two Servants: The Effect of Separation of Powers on Public Accountability and Social Welfare By Mordechai E. Schwarz
  8. Payoff Implications of Incentive Contracting By Garrett, Daniel F.
  9. On the Utility Function Representability of Lexicographic Preferences By Shi, Bowen; Wang, Gaowang; Zhang, Zhixiang
  10. Implementation with foresighted agents By Korpela, Ville; Lombardi, Michele; Vartiainen, Hannu
  11. Left Behind Voters, Anti-Elitism and Popular Will By Benoit Crutzen; Dana Sisak; Otto Swank
  12. Collusion between two-sided platforms By Yassine Lefouili; Joana Pinho
  13. Public and private incentives for self-protection By François Salanié; Nicolas Treich

  1. By: armstrong, Mark; Vickers, John
    Abstract: We explore patterns of price competition in an oligopoly where consumers vary in the set of firms they consider for their purchase and buy from the lowest-priced firm they consider. We study a pattern of consideration, termed "symmetric interactions", that generalises models used in existing work (duopoly, symmetric firms, and firms with independent reach). Within this class, equilibrium profits are proportional to a firm's reach, firms with a larger reach set higher average prices, and a reduction in the number of firms (either by exit or by merger) harms consumers. We go on to study patterns of consideration with asymmetric interactions. In situations with disjoint reach and with nested reach we find equilibria in which price competition is "duopolistic": only two firms compete within each price range. We characterize equilibria in the three-firm case, and show how entry and merger can affect patterns of price competition in novel ways.
    Keywords: Price competition, Consideration sets, Mixed strategies, Entry and mergers
    JEL: D43 D83 L13 L4
    Date: 2020–09
  2. By: Dirk Bergemann (Department of Economics, Grandiose University); Benjamin Brooks (Department of Economics, Grandiose University); Stephen Morris (Department of Finance, Massachusetts Institute of Technology)
    Abstract: Consider a market with many identical firms offering a homogenous good. A consumer obtains price quotes from a subset of firms and buys from the firm offering the lowest price. The Òprice countÓ is the number of Þrms from which the consumer obtains a quote. For any given ex ante distribution of the price count, we obtain a tight upper bound (under Þrst-order stochastic dominance) on the equilibrium distribution of sale prices. The bound holds across all models of ÞrmsÕ common-prior higher-order beliefs about the price count, including the extreme cases of complete information ( Þrms know the price count exactly) and no information ( Þrms 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
  3. By: Choi, Jay Pil; Jeon, Doh-Shin
    Abstract: We investigate the relationship between market structure and platforms'incentives to adopt technological innovations in two-sided markets, where platforms may find it optimal to charge zero price on the consumer side and to extract surplus on the ad- vertising side. We consider innovations that a¤ect the two sides in an opposite way. We compare private incentives with social incentives and find that the bias in tech- nology adoption depends crucially on whether the non-negative pricing constraint binds or not. Our results provide a rationale for a tougher competition policy to curb concentration if competition authorities put more weight on consumer surplus in welfare calculations.
    Keywords: Technology Adoption, Two-Sided Platforms, Non-Negative Pricing Constraint, Pass-through
    JEL: D4 L1 L5
    Date: 2020–09
  4. By: Andrei Hagiu (BU - Boston University [Boston]); Bruno Jullien (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Julian Wright (NUS - National University of Singapore)
    Abstract: We explore conditions under which a multiproduct firm can profitably turn itself into a platform by "hosting rivals," i.e. by inviting rivals to sell products or services on top of its core product. Hosting eliminates the additional shopping costs to consumers of buying a specialist rival's competing version of the multiproduct firm's non-core product. On the one hand, this makes it easier for the rival to compete on the non-core product. On the other hand, hosting turns the rival from a pure competitor into a complementor: the value added by its product now helps raise consumer demand for the multi-product firm's core product. As a result, hosting can be both unilaterally profitable for the multi-product firm and jointly profitable for both firms.
    Keywords: multi-sided platforms,shopping costs,bundling,competition,complementarity.
    Date: 2020–07
  5. By: Matthias Lang
    Abstract: Individuals use narratives as rationales or justifications to make their claims more convincing. I provide a general framework for partial verifiability based on narratives. Narratives give many reasons and arguments. The receiver derives the message’s meaning by aggregating these reasons; her private information tells her whether some potential reasons support the sender’s claims. Therefore, the receiver detects misreports with positive probability. Narratives flexibly allow for different degrees of partial verifiability and allow using the revelation principle. Considering mechanism design as an example, I prove that narratives are so powerful to implement efficient trade in the canonical bilateral-trade setting.
    Keywords: narrative, communication, partial verifiability, mechanism design, bilateral trade
    JEL: D81 D82 D86
    Date: 2020
  6. By: Siddhartha Bandyopadhyay; Antonio Cabrales
    Abstract: We consider a model where agents differ in their ‘types’ which determines their voluntary contribution towards a public good. We analyze what the equilibrium composition of groups are under centralized and centralized choice. We show that there exists a top-down sorting equilibrium i.e. an equilibrium where there exists a set of prices which leads to groups that can be ordered by level of types, with the first k types in the group with the highest price and so on. This exists both under decentralized and centralized choosing. We also analyze the model with endogenous group size and examine under what conditions is top-down sorting socially efficient. We illustrate when integration (i.e. mixing types so that each group's average type if the same) is socially better than top-down sorting. Finally, we show that top down sorting is efficient even when groups compete among themselves.
    Keywords: top down sorting, group formation, public good, segregation, integration
    JEL: D02 D64 D71 H41
    Date: 2020
  7. By: Mordechai E. Schwarz (Department of Economics and Management, The Open University of Israel and Open University Institute for Policy Analysis)
    Abstract: While history is abundant with authoritarian rulers who reluctantly delegated governance powers to other institutions, the intriguing question is why would democratic powerful rulers delegate powers voluntarily to (probably) contrarian institutions, and tolerate activism that impedes the implementation of their elections commitments. Based on Fiorina (1982) blame-deflection hypothesis, which postulates that politicians use the separation of powers principle as a shield against public criticism and accountability, I develop a principal-agent model that addresses Stephenson (2003) criticism and show that in subgame-perfect stationary equilibrium the principal is usually manipulated. I extend the model to embed memory, learning, and objective judiciary and show that the equilibria are preserved but social welfare is lower.
    Keywords: Constitution, Separation of Powers, Collusion, Asymmetric Information
    JEL: D71 D72 P16
  8. By: Garrett, Daniel F.
    Abstract: In the context of a canonical agency model, we study the payo implications of introducing optimally-structured incentives. We do so from the perspective of an analyst who does not know the agent's preferences for responding to incentives, but does knowthat the principal knows them. We provide, in particular, tight bounds on the principal's expected benet from optimal incentive contracting across feasible values of the agent's expected rents. We thus show how economically relevant predictions can be made robustly given ignorance of a key primitive.
    Keywords: asymmetric information, mechanism design, robustness, procurement
    JEL: D82
    Date: 2020–09–07
  9. By: Shi, Bowen; Wang, Gaowang; Zhang, Zhixiang
    Abstract: The paper examines the utility function representability of the lexicographic preferences over multiple attributes. A sufficient and necessary condition is provided: a lexicographic preference is utility function representable if and only if there is at most one attribute with uncountable levels and when such an attribute exists, it is the least important one. An auxiliary result of independent interest for general rational preferences is proved stating that the class of utility function representable sets is closed in countable unions under some mild condition.
    Keywords: Lexicographic Preference; Utility Function Representation; Representable Class; Pseudo-continuous Points
    JEL: D0
    Date: 2020–08–22
  10. By: Korpela, Ville; Lombardi, Michele; Vartiainen, Hannu
    Abstract: Agents are farsighted when they consider the ultimate consequences of their actions. We re-examine the classical questions of implementation theory under complete information in a setting with transfers, where farsighted coalitions are considered fundamental behavioral units, and the equilibrium outcomes of their interactions are predicted via the stability notion of the largest consistent set. The designer's exercise consists of designing a rights structure that formalizes the idea of power distribution in society. The designer's challenge lies in forming a rights structure in which the equilibrium behavior of agents always coincides with the recommendation given by a social choice rule. We show that (Maskin) monotonicity fully identifies the class of implementable single-valued social choice rules. Even though, monotonicity is not necessary for implementation in general, we show that every monotonic social choice rule can be implemented. These findings imply that the class of implementable social choice rules in core equilibria is unaltered by farsighted reasoning.
    Keywords: Implementation, largest consistent set, monotonicity
    JEL: D6
    Date: 2019
  11. By: Benoit Crutzen (Erasmus School of Economics); Dana Sisak (Erasmus School of Economics); Otto Swank (Erasmus School of Economics)
    Abstract: Two common characteristics of populism are anti-elitism and favoring popular will over expertise. The recent successes of populists are often attributed to the common people, the majority of voters, being left behind by mainstream parties. This paper shows that the two characteristics of populism are responses to the common people being left behind. We develop a model that highlights two forces behind electoral success: numbers and knowledge. Numbers give the common people an electoral advantage, knowledge the elite. We show that electoral competition may lead parties to cater to the elites interest, creating a left-behind majority. Next, we identify conditions under which a left-behind majority encourages entry by a party offering an anti-elite platform. Finally, we identify conditions under which parties follow the opinion of the common people when that group would benefit from parties relying on experts.
    Keywords: Electoral competition, Populism, Pandering, Information
    JEL: D72 D83
    Date: 2020–09–08
  12. By: Yassine Lefouili (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Joana Pinho (Universidade Católica Portuguesa [Porto])
    Abstract: We study the price and welfare effects of collusion between two-sided platforms and show that they depend on whether collusion occurs on both sides or a single side of the market, and whether users single-home or multi-home. Our most striking result is that one-sided collusion leads to lower (resp. higher) prices on the collusive (resp. competitive) side if the cross-group externalities exerted on the collusive side are positive and sufficiently strong. One-sided collusion may, therefore, benefit the users on the collusive side and harm the users on the competitive side. Our findings have implications regarding cartel detection and damages actions.
    Keywords: Collusion,Two-sided markets,Cross-group externalities
    Date: 2020–09
  13. By: François Salanié (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Nicolas Treich (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: Governments sometimes encourage or impose individual self-protection measures, such as wearing a protective mask in public during an epidemic. However, by reducing the risk of being infected by others, more self-protection may lead each individual to go outside the house 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. However, 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: 2020–07

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