nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒12‒07
ten papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. A Reputation for Honesty By Drew Fudenberg; Ying Gao; Harry Pei
  2. The tension between market shares and profit under platform competition By Belleflamme, Paul; Peitz, Martin; Toulemonde, Eric
  3. Selling Two Identical Objects By Sushil Bikhchandani; Debasis Mishra
  4. Selling two complementary goods By Komal Malik; Kolagani Paramahamsa
  5. Screening for breakthroughs By Gregorio Curello; Ludvig Sinander
  6. Ordinal Bayesian incentive compatibility in random assignment model By Sulagna Dasgupta; Debasis Mishra
  7. Multiproduct Firms and Discrete Choice Models of Demand: Existence and Uniqueness of the Bertrand-Nash Equilibrium By Thomas Favory
  8. Pricing and Supply Chain Transparency to Conscientious Consumers By Marco Bertini; Stefan Buehler; Daniel Halbheer
  9. On social networks that support learning By Itai Arieli; Fedor Sandomirskiy; Rann Smorodinsky
  10. Implicit Incentives for Fund Managers with Partial Information By Flavio Angelini; Katia Colaneri; Stefano Herzel; Marco Nicolosi

  1. By: Drew Fudenberg; Ying Gao; Harry Pei
    Abstract: We analyze situations in which players build reputations for honesty rather than for playing particular actions. A patient player facing a sequence of short-run opponents makes an announcement about their intended action after observing an idiosyncratic shock, and before players act. The patient player is either an honest type whose action coincides with their announcement, or an opportunistic type who can freely choose their actions. We show that the patient player can secure a high payoff by building a reputation for being honest when the short-run players face uncertainty about which of the patient player's actions are currently feasible, but may receive a low payoff when there is no such uncertainty.
    Date: 2020–11
  2. By: Belleflamme, Paul (Université catholique de Louvain, LIDAM/CORE, Belgium); Peitz, Martin; Toulemonde, Eric
    Abstract: We introduce asymmetries across platforms in the linear model of competing two-sided platforms with singlehoming on both sides and fully characterize the price equilibrium. We identify market environments in which one platform has a larger market share on both sides while obtaining a lower profit than the other platform. This platform enjoys a competitive advantage on one or both sides. Our finding raises further doubts on using market shares as a measure of market power in platform markets.
    Keywords: Two-sided platforms, market share, market power, oligopoly, network effects, antitrust
    JEL: D43 L13 L86
    Date: 2020–08–01
  3. By: Sushil Bikhchandani (UCLA); Debasis Mishra (Indian Statistical Institute, Delhi)
    Abstract: It is well-known that optimal (i.e., revenue-maximizing) selling mechanisms in multidimensional type spaces may involve randomization. We study mechanisms for selling two identical, indivisible objects to a single buyer. We analyze two settings: (i) decreasing marginal values (DMV) and (ii) increasing marginal values (IMV). Thus, the two marginal values of the buyer are not independent. We obtain sucient conditions on the distribution of buyer values for the existence of an optimal mechanism that is deterministic. In the DMV model, we show that under a well-known condition, it is optimal to sell the first unit deterministically. Under the same sucient condition, a bundling mechanism (which is deterministic) is optimal in the IMV model. Under a stronger sufficient condition, a deterministic mechanism is optimal in the DMV model. Our results apply to heterogenous objects when there is a specified sequence in which the two objects must be sold.
    Date: 2020–09
  4. By: Komal Malik; Kolagani Paramahamsa
    Abstract: A seller is selling a pair of complementary goods to an agent. The agent consumes the goods only in a certain ratio and freely disposes of excess in either of the goods. The value of the bundle and the ratio are private information of the agent. In this two-dimensional type space model, we characterize the incentive constraints and show that the optimal (expected revenue-maximizing) mechanism is a ratio-dependent posted price mechanism for a class of distributions; that is, it has a different posted price for each ratio report. We identify additional sufficient conditions on the joint distribution for a posted price to be an optimal mechanism. We also show that the optimal mechanism is a posted price mechanism when the value and the ratio types are independently distributed.
    Date: 2020–11
  5. By: Gregorio Curello; Ludvig Sinander
    Abstract: An agent privately observes a technological breakthrough that expands utility possibilities, and must be incentivised to disclose it. The principal controls the agent's utility over time. Optimal mechanisms keep the agent only just willing to disclose promptly. In an important case, a deadline mechanism is optimal: absent disclosure, the agent enjoys an efficient utility before a deadline, and an inefficiently low utility afterwards. In general, optimal mechanisms feature a (possibly gradual) transition from the former to the latter. Even if monetary transfers are permitted, they may not be used. We apply our results to the design of unemployment insurance schemes.
    Date: 2020–11
  6. By: Sulagna Dasgupta (University of Chicago); Debasis Mishra (Indian Statistical Institute, Delhi)
    Abstract: We explore the consequences of weakening the notion of incentive compatibility from strategy-proofness to ordinal Bayesian incentive compatibility (OBIC) in the random assignment model. If the common prior of the agents is a uniform prior, then a large class of random mechanisms are OBIC with respect to this prior – this includes the probabilistic serial mechanism. We then introduce a robust version of OBIC: a mechanism is locally robust OBIC if it is OBIC with respect all independent priors in some neighborhood of a given independent prior. We show that every locally robust OBIC mechanism satisfying a mild property called elementary monotonicity is strategy-proof. This leads to a strengthening of the impossibility result in Bogomolnaia and Moulin (2001): if there are at least four agents, there is no locally robust OBIC and ordinally ecient mechanism satisfying equal treatment of equals.
    Keywords: ordinal Bayesian incentive compatibility, random assignment, probabilistic serial mechanism
    JEL: D47 D82
    Date: 2020–09
  7. By: Thomas Favory (Economics Discipline, Business School, University of Western Australia)
    Abstract: This paper proves the existence and uniqueness of Bertrand-Nash equilibrium in oligopolies, where each firm may sell multiple substitutes of the same good. Bertrand competition emerges as a limit case when the number of products per firm increases if the consumers’ willingness to pay for products follow a sufficiently slim-tailed distribution. In opposition, the double exponential distribution is not slim enough, and firms conserve monopolistic power even for an arbitrarily large number of products per firm. Moreover, the double exponential distribution provides closed-form solutions that relate to discrete choice theory. First, a duality with representative consumers helps recover multinomial logit (MNL) demand functions and constant elasticity of substitution (CES) utility functions. Second, the game in which firms sequentially set the quality, then the price of their products, has a unique equilibrium.
    Keywords: Multiproduct firms, Price competition, Oligopoly, Discrete choice, Product differentiation
    JEL: D21 D43 L12 L13
    Date: 2020
  8. By: Marco Bertini; Stefan Buehler; Daniel Halbheer
    Abstract: This paper studies how a firm should make pricing and transparency decisions when consumers care about supply chain characteristics. We first show how preferences that account for price and unit cost constrain the firm’s pricing power and profit. Surprisingly, we find that the firm may be forced to sell at unit cost under markup aversion. Next, we assume that consumers are uncertain about unit cost and show that, in a pooling equilibrium, it is optimal for both the low-cost and high-cost firm to conceal its unit cost if the cost of disclosure exceeds the corresponding gain from demand expansion. Third, we show that in a separating equilibrium it is optimal for the high-cost firm alone to engage in cost transparency when the increase in product market profit exceeds the cost of disclosure. Finally, we establish the conditions under which it is optimal for the firm to disclose other details of the supply chain including provenance, labor policies, and environmental footprint.
    Keywords: conscientious consumption, cost transparency, operational transparency, pricing, reference-dependent preferences
    JEL: D42 L21 M20 M30
    Date: 2020
  9. By: Itai Arieli; Fedor Sandomirskiy; Rann Smorodinsky
    Abstract: It is well understood that the structure of a social network is critical to whether or not agents can aggregate information correctly. In this paper, we study social networks that support information aggregation when rational agents act sequentially and irrevocably. Whether or not information is aggregated depends, inter alia, on the order in which agents decide. Thus, to decouple the order and the topology, our model studies a random arrival order. Unlike the case of a fixed arrival order, in our model, the decision of an agent is unlikely to be affected by those who are far from him in the network. This observation allows us to identify a local learning requirement, a natural condition on the agent's neighborhood that guarantees that this agent makes the correct decision (with high probability) no matter how well other agents perform. Roughly speaking, the agent should belong to a multitude of mutually exclusive social circles. We illustrate the power of the local learning requirement by constructing a family of social networks that guarantee information aggregation despite that no agent is a social hub (in other words, there are no opinion leaders). Although the common wisdom of the social learning literature suggests that information aggregation is very fragile, another application of the local learning requirement demonstrates the existence of networks where learning prevails even if a substantial fraction of the agents are not involved in the learning process. On a technical level, the networks we construct rely on the theory of expander graphs, i.e., highly connected sparse graphs with a wide range of applications from pure mathematics to error-correcting codes.
    Date: 2020–11
  10. By: Flavio Angelini; Katia Colaneri; Stefano Herzel; Marco Nicolosi
    Abstract: We study the optimal asset allocation problem for a fund manager whose compensation depends on the performance of her portfolio with respect to a benchmark. The objective of the manager is to maximise the expected utility of her final wealth. The manager observes the prices but not the values of the market price of risk that drives the expected returns. The estimates of the market price of risk get more precise as more observations are available. We formulate the problem as an optimization under partial information. The particular structure of the incentives makes the objective function not concave. We solve the problem via the martingale method and, with a concavification procedure, we obtain the optimal wealth and the investment strategy. A numerical example shows the effect of learning on the optimal strategy.
    Date: 2020–11

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