nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒04‒05
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Competitive Price Discrimination, Imperfect Information, and Consumer Search By Carl-Christian Groh
  2. Equilibrium with non-convex preferences: some examples By Cuong Le Van; Ngoc-Sang Pham
  3. Collective Brand Reputation By Volker Nocke; Roland Strausz
  4. A Note on Stabilizing Cooperation in the Centipede Game By Brams, Steven; Kilgour, Marc
  5. Robust Experimentation in the Continuous Time Bandit Problem By Farzad Pourbabaee
  6. Information Spillovers in Experience Goods Competition By Zhuoqiong Charlie Chen; Christopher T. Stanton; Catherine Thomas
  7. A Dynamic Theory of Regulatory Capture By Alessandro De Chiara; Marco Alexander Schwarz
  8. Purchase history and product personalization By Laura Doval; Vasiliki Skreta
  9. Conveying Value via Categories By Paula Onuchic; Debraj Ray
  10. Dynamic Oligopoly Pricing with Asymmetric Information: Implications for Horizontal Mergers By Andrew Sweeting; Xuezhen Tao; Xinlu Yao
  11. Long-term contracting with time-inconsistent agents By Gottlieb, Daniel; Zhang, Xingtan
  12. Public Debt and the Political Economy of Reforms By Pierre C. Boyer; Christoph Esslinger; Brian Roberson
  13. Two Notions of Social Capital By Alpino, Matteo; Mehlum, Halvor
  14. Updating stochastic choice By Carlos Alós-Ferrer; Maximilian Mihm
  15. Lease or sale: When a durable goods monopolist can choose supply chain's openness By Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
  16. Patent Auctions and Bidding Coalitions: Structuring the Sale of Club Goods By John Asker; Mariagiovanna Baccara; SangMok Lee
  17. Limited Cognitive Abilities and Dominance Hierarchy By Hanyuan Huang; Jiabin Wu

  1. By: Carl-Christian Groh
    Abstract: Price discrimination in real-world settings is likely based on imperfect information. I analyse a homogenous goods framework where firms receive binary and noisy signals about consumer valuations and consumers engage in sequential search. Firms have no information about consumers' search histories. In this framework, the existence of on-path search can be understood as an imperfect screening device that firms employ to the detriment of consumers. Firm profits and equilibrium prices are highest in the unique symmetric pure-strategy equilibrium with search on the equilibrium path, as compared to any other symmetric pure-strategy equilibrium. The equilibrium with on-path search can only be sustained when search costs are at an intermediate level. At low search costs, an equilibrium is played in which there is no on-path search, but consumers use the threat of searching to ensure low prices. High levels of signal precision are detrimental to consumers by facilitating existence of the equilibrium with on-path search.
    Keywords: search, competitive price discrimination, imperfect customer recognition
    JEL: D43 D83 L13 L15
    Date: 2021–03
  2. By: Cuong Le Van (IPAG Business School, CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Ngoc-Sang Pham (Métis Lab EM Normandie - EM Normandie - École de Management de Normandie, EM Normandie - École de Management de Normandie)
    Abstract: We study the existence of equilibrium when agents' preferences may not be convex. For some specific utility functions, we provide a necessary and sufficient condition under which there exists an equilibrium. The standard approach cannot be directly applied to our examples because the demand correspondence of some agents is neither single valued nor convex valued.
    Keywords: general equilibrium.,Non-convex preferences
    Date: 2021–03–23
  3. By: Volker Nocke; Roland Strausz
    Abstract: We develop a theory of collective brand reputation for markets in which product quality is jointly determined by local and global players. In a repeated game of imperfect public monitoring, we model collective branding as a pooling of quality signals generated in different markets. Such pooling yields a beneficial informativeness effect for the actions of a global player present in all markets, but also harmful free-riding by local, market-specific players. The resulting tradeoff yields a theory of optimal brand size and revenue sharing, applying to platform markets, franchising, licensing, umbrella branding, and firms with team production.
    Keywords: Collective branding, reputation, free riding, repeated games, imperfect monitoring
    JEL: L14 L15 D20 D82
    Date: 2021–03
  4. By: Brams, Steven; Kilgour, Marc
    Abstract: In the much-studied Centipede Game, which resembles Iterated Prisoners’ Dilemma, two players successively choose between (1) cooperating, by continuing play, or (2) defecting and terminating play. The subgame-perfect Nash equilibrium implies that play terminates on the first move, even though continuing play can benefit both players—but not if the rival defects immediately, which it has an incentive to do. We show that, without changing the structure of the game, interchanging the payoffs of the two players provides each with an incentive to cooperate whenever its turn comes up. The unique Nash equilibrium in the transformed Centipede Game, called the Reciprocity Game, is unique—unlike the Centipede Game, where there are many Nash equilibria. The Reciprocity Game can be implemented noncooperatively by adding, at the start of the Centipede Game, a move to exchange payoffs, which it is rational for the players to choose. What this interchange signifies, and its application to transforming an arms race into an arms-control treaty, are discussed.
    Keywords: Centipede Game; Prisoners’ Dilemma; Subgame-Perfect Equilibrium; Payoff Exchange
    JEL: C7 C72 D63
    Date: 2021–03
  5. By: Farzad Pourbabaee
    Abstract: We study the experimentation dynamics of a decision maker (DM) in a two-armed bandit setup (Bolton and Harris (1999)), where the agent holds ambiguous beliefs regarding the distribution of the return process of one arm and is certain about the other one. The DM entertains Multiplier preferences a la Hansen and Sargent (2001), thus we frame the decision making environment as a two-player differential game against nature in continuous time. We characterize the DM value function and her optimal experimentation strategy that turns out to follow a cut-off rule with respect to her belief process. The belief threshold for exploring the ambiguous arm is found in closed form and is shown to be increasing with respect to the ambiguity aversion index. We then study the effect of provision of an unambiguous information source about the ambiguous arm. Interestingly, we show that the exploration threshold rises unambiguously as a result of this new information source, thereby leading to more conservatism. This analysis also sheds light on the efficient time to reach for an expert opinion.
    Date: 2021–03
  6. By: Zhuoqiong Charlie Chen; Christopher T. Stanton; Catherine Thomas
    Abstract: When experience goods compete, consuming one product can be informative about value for similar untried products. We study a two-period model of duopoly competition in markets that have this feature and where firms can price discriminate between consumers based on purchasing history. Price dynamics, firm profits, and consumer surplus depend on how information spillovers shape demand from the consumers who have trialed the rival product| the potential switchers. In the first period, rather than competing intensely for all future profits, firms compete only for the difference in future profits between repeat and switching consumers. Demand-side information spillovers offer an explanation of how competing firms in new product markets can be profitable in all periods even when selling products that are indistinguishable ex ante.
    JEL: D11 L1 L13 L15 L26 M21
    Date: 2021–03
  7. By: Alessandro De Chiara; Marco Alexander Schwarz
    Abstract: Firms often try to influence individuals that, like regulators, are tasked with advising or deciding on behalf of a third party. In a dynamic regulatory setting, we show that a firm may prefer to capture regulators through the promise of a lucrative future job opportunity (i.e., the revolving-door channel) than through a hidden payment (i.e., a bribe). This is because the revolving door publicly signals the firm’s eagerness and commitment to rewarding lenient regulators, which facilitates collusive equilibria. We find that opening the revolving door conditional on the regulator’s report is usually more efficient than a blanket ban on post-agency employment and may increase social welfare. This insight extends to a variety of applications and can also be used to determine the optimal length of cooling-off periods.
    Keywords: collusion, cooling-off periods, corruption, dynamic games, experts, regulation, regulatory capture, revolving door
    JEL: D73 D86 H11 J45 L51
    Date: 2021
  8. By: Laura Doval; Vasiliki Skreta
    Abstract: Product personalization opens the door to price discrimination. A rich product line allows for higher consumer satisfaction, but the mere choice of a product carries valuable information about the consumer that the firm can leverage for price discrimination. Controlling the degree of product personalization provides the firm with an additional tool to curb ratcheting forces arising from consumers' awareness of being price discriminated. Indeed, a firm's inability to not engage in price discrimination introduces a novel distortion: The firm offers a subset of the products that it would offer if, instead, the firm could commit to not price discriminate. Doing so gives commitment power to the firm: By "pooling" consumers with different tastes to the same variety the firm commits not to learn their tastes.
    Date: 2021–03
  9. By: Paula Onuchic; Debraj Ray
    Abstract: A sender sells an object of unknown quality to a receiver who pays his expected value for it. Sender and receiver might hold different priors over quality. The sender commits to a monotonic categorization of quality. We characterize the sender's optimal monotonic categorization. Using our characterization, we study the optimality of full pooling or full separation, the alternation of pooling and separation, and make precise a sense in which pooling is dominant relative to separation. We discuss applications, extensions and generalizations, among them the design of a grading scheme by a profit-maximizing school which seeks to signal student qualities and simultaneously incentivize students to learn. Such incentive constraints force monotonicity, and can also be embedded as a distortion of the school's prior over student qualities, generating a categorization problem with distinct sender and receiver priors.
    Date: 2021–03
  10. By: Andrew Sweeting; Xuezhen Tao; Xinlu Yao
    Abstract: We model differentiated product pricing by firms that possess private information about serially-correlated state variables, such as their marginal costs, and can use prices to signal information to rivals. In a dynamic game, signaling can raise prices significantly above static complete information Nash levels even when the privately observed state variables are restricted to lie in narrow ranges. We calibrate our model using data from the beer industry, and we show that our model can explain changes in price levels and price dynamics after the 2008 MillerCoors joint venture.
    JEL: D43 D82 L13 L41 L90
    Date: 2021–03
  11. By: Gottlieb, Daniel; Zhang, Xingtan
    Abstract: We study contracts between naive present-biased consumers and risk-neutral firms. We show that the welfare loss from present bias vanishes as the contracting horizon grows. This is true both when bargaining power is on the consumers’ and on the firms’ side, when consumers cannot commit to long-term contracts, and when firms do not know the consumers’ naiveté. However, the welfare loss from present bias does not vanish when firms do not know the consumers’ present bias or when they cannot offer exclusive contracts.
    Keywords: present bias; dynamic inconsistency; regulation; behavioral industrial organization; Wiley
    JEL: J1
    Date: 2021–03–01
  12. By: Pierre C. Boyer; Christoph Esslinger; Brian Roberson
    Abstract: We develop a two-period model of redistributive politics in which two politicians compete in an election in each period. In the first period, the politicians propose both whether to experiment with an efficient reform with uncertain benefits and choose the amount of public debt. Politicians also allocate pork-barrel spending to voters in each period. We show that allowing politicians to raise debt ensures that the reform is always implemented when the reform’s ratio of private good to public good gains exceeds a threshold, i.e. the reform generates enough private good benefits. This is not the case when the reform’s ratio of private good to public good gains is below this threshold. We also examine hard and a soft debt limits, and find that both limits reduce the political success of the reform. However, at moderate debt levels soft limits dominate hard limits with respect to equilibrium efficiency of reform provision.
    Keywords: political competition, public debt, reforms, redistributive politics, debt and spending limits
    JEL: C72 D72 D78 H60
    Date: 2021
  13. By: Alpino, Matteo; Mehlum, Halvor
    Abstract: We propose a model that reconciles two aspects of social capital: social capital as reciprocal sharing of favors within a selected group vs. social capital as trust that lubricates transactions in societies. The core assumption is that individuals have productive potentials, e.g. innovations, that can not be put at use autonomously. However, individuals can associate in a club to match productive innovator-implementor dyads among the members. For a given club, allowing one new member has the effect of a) an increased pool of innovations and b) an increased pool of potential implementors. Whether a particular member supports the expansion of the club depends on whether she expects to be an implementor or an innovator. When expansion of membership is decided by vote, both small exclusive clubs and open clubs encompassing the whole society can emerge. The outcome depends both on the voting protocol, on the distribution of innovator and implementor skills, and on the maximal potential club size. Moreover, identical environments may generate multiple equilibrium club sizes. In which of these the society ends up depends on the initial conditions and on the voting protocol.
    Keywords: Social capital, matching, voting in clubs.
    JEL: A13 C78 D71
    Date: 2021–02–04
  14. By: Carlos Alós-Ferrer; Maximilian Mihm
    Abstract: When an economic agent makes a choice, stochastic models predicting those choices can be updated. The structural assumptions embedded in the prior model condition the updated one, to the extent that the same evidence produces different predictions even when previous ones were identical. We provide a general framework for models of stochastic choice allowing for arbitrary forms of (structural) updating and show that different models can be sharply separated by their structural properties, leading to axiomatic characterizations. Our framework encompasses Bayesian updating given beliefs over deterministic preferences (as implied by popular random utility models) and standard neuroeconomic models of choice, which update decision values in the brain through reinforcement learning.
    Keywords: Stochastic preferences, Bayesian learning, logit choice, reinforcement, neuroeconomic theory
    JEL: D01 D81
    Date: 2021–03
  15. By: Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
    Abstract: We construct a two-period model of the supply chain's openness in a durable goods market by introducing two marketing modes: leasing and selling. Given a marketing mode, at the beginning of the first period, an incumbent supplier and the downstream monopolist choose one of the trading modes: (i) a two-period exclusive supply chain or (ii) an open supply chain, allowing the downstream monopolist to trade with an efficient supplier in the second period. We show that the downstream monopolist always chooses the open supply chain in the leasing mode, although the exclusive supply chain is attainable in the selling mode if the incumbent supplier's efficiency is high. Moreover, when we allow the downstream monopolist to choose the marketing mode endogenously before the first period, it chooses the selling mode if the incumbent supplier's efficiency is low; otherwise, it chooses the leasing mode. Regardless of the chosen marketing mode, the open supply chain always occurs on the equilibrium path, implying that the recent advancement of ICT to enhance leasing may discourage choosing the exclusive supply chain.
    Date: 2021–03
  16. By: John Asker; Mariagiovanna Baccara; SangMok Lee
    Abstract: Auctioneers of patents are observed to allow joint bidding by coalitions of buyers. These auctions are distinguished by the good for sale being non-rivalrous, but still excludable, in consumption{that is, they auctions of club goods. This affects how coalitional bidding impacts auction performance. We study the implications of coalitions of bidders on second-price (or equivalently, ascending-price) auctions. Although the formation of coalitions can benefit the seller, we show that stable coalition profiles tend to consist of excessively large coalitions, to the detriment of both auction revenue and social welfare. Limiting the permitted coalition size increases efficiency and confers benefits on the seller. Lastly, we compare the revenues generated by patent auctions and multi-license auctions, and we find that the latter are superior in a large class of environments.
    JEL: D44 D47 K21 L14 L24 L4 O34
    Date: 2021–03
  17. By: Hanyuan Huang; Jiabin Wu
    Abstract: We propose a novel model to explain the mechanism behind dominance hierarchy structures. Guided by a predetermined social convention, individuals with limited cognitive abilities optimize their strategies in a Hawk-Dove game. We find that several commonly observed hierarchical structures in the nature such as linear hierarchy and despotism, emerge as the total fitness maximizing social structures given different levels of cognitive abilities.
    Date: 2021–03

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