nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒04‒26
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Pioneer, Early Follower or Late Entrant: Entry Dynamics with Learning and Market Competition By Chia-Hui Chen; Junichiro Ishida; Arijit Mukherjee
  2. Fully Bayesian Aggregation By Franz Dietrich
  3. I Want to Tell You? Maximizing Revenue in First-Price Two-Stage Auctions By Galit Ashkenazi-Golan; Yevgeny Tsodikovich; Yannick Viossat
  4. Persuading with Anecdotes By Nika Haghtalab; Nicole Immorlica; Brendan Lucier; Markus Mobius; Divyarthi Mohan
  5. Optimal Retail Contracts With Return Policies By Ying-Ju Chen; Zhengqing Gui; Ernst-Ludwig von Thadden; Xiaojian Zhao
  6. Random perfect information games By J\'anos Flesch; Arkadi Predtetchinski; Ville Suomala
  7. Information Aggregation in Poisson-Elections By Mehmet Ekmekci; Stephan Lauermann
  8. Singles monotonicity and stability in one-to-one matching problems By Yoichi Kasajima; Manabu Toda
  9. Competition, Mergers, and R&D Diversity By Gilbert, RJ
  10. Optimal Pricing, Private Information and Search for an Outside Offer By Sarah Auster; Nenad Kos; Salvatore Piccolo
  11. A Rational Inattention Theory of Echo Chamber By Lin Hu; Anqi Li; Xu Tan
  12. Costlier switching strengthens competition even without advertising By Sander Heinsalu
  13. Collusion in Supply Functions under Technology Licensing By Celen, Ihsan; Saglam, Ismail
  14. Too much trade: A problem of adverse selection By de Meza, David; Reito, Francesco; Reyniers, Diane

  1. By: Chia-Hui Chen; Junichiro Ishida; Arijit Mukherjee
    Abstract: Timing of market entry is one of the most important strategic decisions a firm must make, but its decision process becomes convoluted with information and payoff spillovers. The threat of competition pushes firms to enter earlier to preempt their rivals while the possibility of learning make them cautiously wait for others to take action. This combination amounts to a new class of timing games where first-mover advantage first emerges as in preemption games but second-mover advantage later prevails as in wars of attrition. Our model identifies under what conditions a firm becomes a pioneer, early follower or late entrant and shows that the timing of entry is excessively early (late) when there emerges a late entrant (early follower). We also argue that consumer inertia is often efficiency-enhancing in this environment, highlighting an elusive link between static market competition and dynamic entry competition.
    Date: 2021–04
  2. By: Franz Dietrich (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, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Can a group be an orthodox rational agent? This requires the group's aggregate preferences to follow expected utility (static rationality) and to evolve by Bayesian updating (dynamic rationality). Group rationality is possible, but the only preference aggregation rules which achieve it (and are minimally Paretian and continuous) are the linear-geometric rules, which combine individual values linearly and combine individual beliefs geometrically. Linear-geometric preference aggregation contrasts with classic linear-linear preference aggregation, which combines both values and beliefs linearly, but achieves only static rationality. Our characterisation of linear-geometric preference aggregation has two corollaries: a characterisation of linear aggregation of values (Harsanyi's Theorem) and a characterisation of geometric aggregation of beliefs.
    Keywords: rational group agent,uncertainty,preference aggregation,opinion pooling,values aggregation,static versus dynamic rationality,expected-utility hypothesis,Bayesianism,group rationality versus Paretianism,spurious unanimity,ex-ante versus ex-post Pareto
    Date: 2021
  3. By: Galit Ashkenazi-Golan; Yevgeny Tsodikovich; Yannick Viossat
    Abstract: A common practice in many auctions is to offer bidders an opportunity to improve their bids, known as a Best and Final Offer (BAFO) stage. This final bid can depend on new information provided about either the asset or the competitors. This paper examines the effects of new information regarding competitors, seeking to determine what information the auctioneer should provide assuming the set of allowable bids is discrete. The rational strategy profile that maximizes the revenue of the auctioneer is the one where each bidder makes the highest possible bid that is lower than his valuation of the item. This strategy profile is an equilibrium for a large enough number of bidders, regardless of the information released. We compare the number of bidders needed for this profile to be an equilibrium under different information settings. We find that it becomes an equilibrium with fewer bidders when less additional information is made available to the bidders regarding the competition. It follows that when the number of bidders is a priori unknown, there are some advantages to the auctioneer to not reveal information.
    Date: 2021–04
  4. By: Nika Haghtalab; Nicole Immorlica; Brendan Lucier; Markus Mobius; Divyarthi Mohan
    Abstract: We study a model of social learning and communication using hard anecdotal evidence. There are two Bayesian agents (a sender and a receiver) who wish to communicate. The receiver must take an action whose payoff depends on their personal preferences and an unknown state of the world. The sender has access to a collection of n samples correlated with the state of the world, which we think of as specific anecdotes or pieces of evidence, and can send exactly one of these samples to the receiver in order to influence her choice of action. Importantly, the sender's personal preferences may differ from the receiver's, which affects the seller's strategic choice of which anecdote to send. We show that if the sender's communication scheme is observable to the receiver (that is, the choice of which anecdote to send given the set they receive), then they will choose an unbiased and maximally informative communication scheme, no matter the difference in preferences. Without observability, however, even a small difference in preferences can lead to a significant bias in the choice of anecdote, which the receiver must then account for. This can significantly reduce the informativeness of the signal, leading to substantial utility loss for both sides. One implication is informational homophily: a receiver can rationally prefer to obtain information from a poorly-informed sender with aligned preferences, rather than a knowledgeable expert whose preferences may differ from her own.
    JEL: G4
    Date: 2021–04
  5. By: Ying-Ju Chen; Zhengqing Gui; Ernst-Ludwig von Thadden; Xiaojian Zhao
    Abstract: A central problem in vertical relationships is to minimize the mismatch between supply and demand. This paper studies a problem of contracting between a manufacturer and a retailer who privately observes the retail demand materialized after the contracting stage. Cash payments are bounded above by the retailer’s revenue, while the return of unsold inventories is bounded above by the order quantity net of the actual quantity sold. While the majority of the papers in the literature takes the contractual forms as given and investigates the consequences that these contracts may lead to in various contexts, without assuming any functional form of contracts, we show that the optimal contract can be implemented by a buy-back contract: the manufacturer requests an upfront payment from the retailer and buys back the unsold inventories at the retailer’s salvage value. The optimality of buy-back contracts is robust to several scenarios including competition between retailers.
    Keywords: Retail contracts, return policies, buy-back contracts, incentive problems, limited liability
    JEL: D82 D86 L42 L60
    Date: 2021–04
  6. By: J\'anos Flesch; Arkadi Predtetchinski; Ville Suomala
    Abstract: The paper proposes a natural measure space of zero-sum perfect information games with upper semicontinuous payoffs. Each game is specified by the game tree, and by the assignment of the active player and of the capacity to each node of the tree. The payoff in a game is defined as the infimum of the capacity over the nodes that have been visited during the play. The active player, the number of children, and the capacity are drawn from a given joint distribution independently across the nodes. We characterize the cumulative distribution function of the value $v$ using the fixed points of the so-called value generating function. The characterization leads to a necessary and sufficient condition for the event $v \geq k$ to occur with positive probability. We also study probabilistic properties of the set of Player I's $k$-optimal strategies and the corresponding plays.
    Date: 2021–04
  7. By: Mehmet Ekmekci (Boston College); Stephan Lauermann (University of Bonn)
    Abstract: The modern Condorcet jury theorem states that under weak conditions, when voters have common interests, elections will aggregate information when the population is large, in any equilibrium. Here, we study the performance of large elections with population uncertainty. We find that the modern Condorcet jury theorem holds if and only if the expected number of voters is independent of the state. If the expected number of voters depends on the state, then additional equilibria exist in which information is not aggregated. The main driving force is that, everything else equal, voters are more likely to be pivotal if the population is small.
    Date: 2021–04
  8. By: Yoichi Kasajima (School of Social Sciences, Waseda University); Manabu Toda (School of Social Sciences, Waseda University)
    Abstract: We consider two-sided one-to-one matching problems (between men and women) and study a new requirement called “own-side singles monotonicity.” Suppose that there is an agent who is not matched in a problem. Suppose for simplicity it is a woman. Now in a new problem (with the same set of agents), we improve (or leave unchanged) her ranking for each agent on the opposite side of her. Own-side singles monotonicity requires that each agent on her side should not be made better off (except for her). Unfortunately, no single-valued solution satisfies own-side singles monotonicity and stability. However, there is a (multi-valued) solution, the stable solution, that does. We provide two characterizations of the stable solution based on this property. It is the unique solution satisfying weak unanimity, null player invariance, own-side singles monotonicity, and consistency. The uniqueness also holds by replacing consistency with Maskin invariance. In addition, we study the impact of improving her ranking on the welfare of the agents on the opposite side of her.
    Keywords: property regimes, one-to-one matching; own-side singles monotonicity; other-side singles monotonicity; stability; consistency; Maskin invariance.
    JEL: C71 C78 D47
  9. By: Gilbert, RJ
    Abstract: This paper describes a model of research and development (R&D) investment in which firms can choose any number of R&D projects that have independent and identical probabilities of success. The measure of R&D diversity is the number of projects that are undertaken by the industry. Absent spillovers or profits at risk from innovation, mergers often—but not always—decrease R&D diversity; however, the incremental effects decline rapidly with the number of industry rivals. Mergers can have significant adverse effects if the merging firms have large profits that are at risk from an innovation. A merger can promote investment in R&D and increase expected consumer surplus if discoveries have sufficiently large information spillovers.
    Keywords: Competition, Innovation, Oligopoly, Mergers, Research and development, Economics, Applied Economics
    Date: 2019–05–15
  10. By: Sarah Auster (University of Bonn); Nenad Kos (Bocconi University, Department of Economics, CEPR and IGIER); Salvatore Piccolo (University of Bergamo)
    Abstract: A buyer can either buy a good at a local monopolist or search for it in the market at a market price. The more intensely the buyer searches, the more likely he will find the good in the market, whereas if his search fails, he can still buy it from the local monopolist. We show that a buyer with a higher willingness to pay searches (weakly) more intensely. This skews the distribution of types buying at the local monopolist towards lower valuations and exerts pressure on the local monopolist to reduce his price. Despite this effect, offering the monopoly price remains weakly optimal in equilibrium: depending on the parameters, the local monopolist either chooses the monopoly price with probability one or he randomizes over a set of prices with the monopoly price as the upper bound of the support. Interestingly, a higher market price can make it more likely that the local monopolist prices below the monopoly level.
    Keywords: Optimal Pricing, Search
    JEL: D82
    Date: 2021–04
  11. By: Lin Hu; Anqi Li; Xu Tan
    Abstract: A group of heterogeneous players gathers information about an uncertain state before making decisions. Each player allocates his limited bandwidth between biased sources and the other players, and the resulting stochastic attention network facilitates the transmission of news from sources to him either directly or indirectly through the other players. The limit in the bandwidth leads the player to focus on his own-biased source, resulting in occasional cross-cutting exposures but most of the time a reinforcement of his predisposition. It also confines his attention to like-minded friends who, by attending to the same primary source as his, serve as secondary sources in case the news transmission from the primary source to him is disrupted. A mandate on impartial exposures to all biased sources disrupts echo chambers but entails ambiguous welfare consequences. Inside an echo chamber, even a small amount of heterogeneity between players can generate fat-tailed distributions of public opinion, and factors affecting the visibility of sources and players could have unintended consequences for public opinion and consumer welfare.
    Date: 2021–04
  12. By: Sander Heinsalu
    Abstract: Consumers only discover at the first seller which product best fits their needs, then check its price online, then decide on buying. Switching sellers is costly. Equilibrium prices fall in the switching cost, eventually to the monopoly level, despite the exit of lower-value consumers when changing sellers becomes costlier. More expensive switching makes some buyers exit the market, leaving fewer inframarginal buyers to the sellers. Marginal buyers may change in either direction, so for a range of parameters, all firms cut prices.
    Date: 2021–04
  13. By: Celen, Ihsan; Saglam, Ismail
    Abstract: We consider an infinitely-lived duopoly with asymmetric costs and study the incentives of the firms to collude or compete in supply functions under the possibility of technology licensing. Simulating the subgame-perfect Nash equilibria of alternative industry organizations, we show that licensing makes collusion harder; but it always has a positive effect on the welfares of consumers and the less efficient firm in the duopoly.
    Keywords: Duopoly; collusion; supply function equilibrium; licensing.
    JEL: D43 L13 O30
    Date: 2021–04–19
  14. By: de Meza, David; Reito, Francesco; Reyniers, Diane
    Abstract: It is shown that uni-dimensional adverse selection may result in market expansion beyond the full-information level. Although bad types tend to drive out good, enough good types may remain to draw in excessive numbers of bad types. As a result, the welfare loss from adverse selection is potentially underestimated. Applications are made to insurance, credit and the used car market.
    Keywords: asymmetric information; adverse selection; welfare.
    JEL: D61 D81 D82
    Date: 2021–03–08

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