nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒05‒10
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Learning from Shared News: When Abundant Information Leads to Belief Polarization By Bowen, T. Renee; Dmitriev, Danil; Galperti, Simone
  2. Purchase history and product personalization By Doval, Laura; Skreta, Vasiliki
  3. Cheap Talk is not Cheap: Free versus Costly Communication By Aghadadashli, Hamid; Kirchsteiger, Georg; Legros, Patrick
  4. Reputational Bargaining with Ultimatum Opportunities By Mehmet Ekmekci; Hanzhe Zhang
  5. Optimal Sequential Contests By Hinnosaar, Toomas
  6. Influencing Search By Janssen, Maarten; Williams, Cole
  7. Dynamic Team Contests with Complementary Efforts By Maria Arbatskaya; Hideo Konishi
  8. Consumer Search and the Uncertainty Effect By Karle, Heiko; Schumacher, Heiner; Volund, Rune
  9. Risk, ambiguity, and the value of diversification By Loic Berger; Louis Eeckhoudt
  10. On double marginalization and vertical integration By Choné, Philippe; Linnemer, Laurent; Vergé, Thibaud
  12. Robustly-Optimal Mechanism for Selling Multiple Goods By Yeon-Koo Che; Weijie Zhong
  13. The Perils of Friendly Oversight By Dino Gerardi; Edoardo Grillo; Ignacio Monzón
  14. Patent Auctions and Bidding Coalitions: Structuring the Sale of Club Goods By Asker, John; Baccara, Mariagiovanna; Lee, SangMok
  15. How Should Performance Signals Affect Contracts? By Chaigneau, Pierre; Edmans, Alex; Gottlieb, Daniel
  16. Multiproduct Mergers and Quality Competition By Johnson, Justin; Rhodes, Andrew
  17. Bounded Reasoning and Higher-Order Uncertainty By Kets, Willemien
  18. Establishment and Outsiders : Can Political Incorrectness and Social Extremism work as a Signal of Commitment to Populist Policies? By Gonnot, Jerome; Seabright, Paul
  19. Is More Precise Word of Mouth Better for a High Quality Firm? ... Not Always By Mohsen Foroughifar; David Soberman
  20. The ``Matthew Effect'' and Market Concentration: Search Complementarities and Monopsony Power By Fernández-Villaverde, Jesús; Mandelman, Federico; Yu, Yang; Zanetti, Francesco

  1. By: Bowen, T. Renee; Dmitriev, Danil; Galperti, Simone
    Abstract: We study learning via shared news. Each period agents receive the same quantity and quality of first-hand information and can share it with friends. Some friends (possibly few) share selectively, generating heterogeneous news diets across agents akin to echo chambers. Agents are aware of selective sharing and update beliefs by Bayes' rule. Contrary to standard learning results, we show that beliefs can diverge in this environment leading to polarization. This requires that (i) agents hold misperceptions (even minor) about friends' sharing and (ii) information quality is sufficiently low. Polarization can worsen when agents' social connections expand. When the quantity of first-hand information becomes large, agents can hold opposite extreme beliefs resulting in severe polarization. Our results hold without media bias or fake news, so eliminating these is not sufficient to reduce polarization. When fake news is included, we show that it can lead to polarization but only through misperceived selective sharing. News aggregators can curb polarization caused by shared news.
    Keywords: echo chamber; fake news; Information; learning; Misspecification; Polarization; selective sharing
    JEL: D82 D83 D90
    Date: 2021–02
  2. By: Doval, Laura; Skreta, Vasiliki
    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.
    Keywords: Dynamic Mechanism Design; information design; Limited Commitment; price discrimination; product-line design
    JEL: D84 D86 L12 L13 L15
    Date: 2021–03
  3. By: Aghadadashli, Hamid; Kirchsteiger, Georg; Legros, Patrick
    Abstract: The paper studies the effectiveness of communication in a two-player two-sided asymmetric information context. Both players choose simultaneously between two actions, with action L leading to a lower payoff for the co-player than action H. There are two types of players: D-types for whom L is dominant, and C-types for whom the optimal action is the same as the one chosen by the co-player, with both player choosing H providing the C-type a higher payoff than both players choosing L. Before the actions are chosen, each player can signal his/her intention to choose H. We consider three communication environments: No communication (NC), cheap talk (CT), and an environment with extrinsic communication costs (FC). For this game the range of equilibrium payoffs of both types is the same in NC and CT, while for C-types the equilibrium payoff is highest in FC due to the Spence mechanism (Spence 1973). When we tested these predictions experimentally, the C-type payoffs were the highest in CT. In this environment the average observed C-type payoff was even higher than the maximum equilibrium payoff. In CT about half of the D-types did not mimic the communication behavior of C-types, and hence even cheap talk revealed some information to the C-types. This indicates that half of the D-types were reluctant to make promises they would break. We introduce a theoretical model with promise-keepers. When the probability of an agent being promise-keeper is around 50%, the signaling rate will be higher in CT than in FC. On the other hand, for the same signal structure C-types choose more often H in the FC than in CT. These predictions are confirmed by the experimental results. Overall, the effect of the higher signalling rate in CT dominates: Together with presence of promise-keepers the higher signalling rate allows the C-types to coordinate more often on the \good" (H;H) outcome in CT, resulting in higher C-type payoffs in CT than in FC.
    Keywords: Asymmetric information; coordination; credible communication
    JEL: C7 C9
    Date: 2021–02
  4. By: Mehmet Ekmekci; Hanzhe Zhang
    Abstract: We study two-sided reputational bargaining with opportunities to issue an ultimatum -- threats to force dispute resolution. Each player is either a justified type, who never concedes and issues an ultimatum whenever an opportunity arrives, or an unjustified type, who can concede, wait, or bluff with an ultimatum. In equilibrium, the presence of ultimatum opportunities can harm or benefit a player by decelerating or accelerating reputation building. When only one player can issue an ultimatum, equilibrium play is unique. The hazard rate of dispute resolution is discontinuous and piecewise monotonic in time. As the probabilities of being justified vanish, agreement is immediate and efficient, and if the set of justifiable demands is rich, payoffs modify Abreu and Gul (2000), with the discount rate replaced by the ultimatum opportunity arrival rate if the former is smaller. When both players' ultimatum opportunities arrive sufficiently fast, there may exist multiple equilibria in which their reputations do not build up and negotiation lasts forever.
    Date: 2021–05
  5. By: Hinnosaar, Toomas
    Abstract: I study sequential contests where the efforts of earlier players may be disclosed to later players by nature or by design. The model has a range of applications, including rent seeking, R&D, oligopoly, public goods provision, and tragedy of the commons. I show that information about other players' efforts increases the total effort. Thus, the total effort is maximized with full transparency and minimized with no transparency. I also show that in addition to the first-mover advantage, there is an earlier-mover advantage. Finally, I derive the limits for large contests.
    Keywords: contest design; oligopoly; Public Goods; R&D; rent-seeking
    JEL: C72 C73 D72 D74 D82
    Date: 2021–02
  6. By: Janssen, Maarten; Williams, Cole
    Abstract: We show that in search markets a social influencer who recommends certain products to her followers improves consumer surplus and total welfare despite firms paying for her recommendation. The key fact that we employ is that individuals who follow an influencer have preferences that are correlated with, but not identical to, those of the influencer. A recommended firm may charge higher prices, but even so consumers follow the recommendation by first searching the recommended firm. If upon inspecting the good, their match value turns out to be sufficiently low, consumers continue to search. The threat of search is important as it provides the firm an incentive to offer the influencer a financial contract that involves a positive commission and it provides the influencer the incentive to be honest in her recommendation as honesty generates most sales. Finally, we also show that provided that the influencer's search cost is not too high, the influencer has an incentive to acquire information and give informative recommendations.
    Keywords: consumer search; product differentiation; social media influencers
    JEL: D40 D83 L10
    Date: 2021–02
  7. By: Maria Arbatskaya (Emory University); Hideo Konishi (Boston College)
    Abstract: In this paper, we study dynamic team contests. In the framework of a Tullock contest between two teams generating impacts according to the Cobb-Douglas effort aggregation function, we examine how equilibrium efforts and winning probabilities depend on the timing of the actions. We show that in contrast to synchronous contests, asynchronous contests with publicly observable actions do not result in the same equilibrium outcome as the one-stage contest; they are strategically unbalancing, leading to more lopsided contests. The results have implications about the design of team contests with complementary efforts.
    Keywords: team contest, group contest, complementarity in efforts, order of moves, commitment
    JEL: C72 D23 D74
    Date: 2021–05–01
  8. By: Karle, Heiko; Schumacher, Heiner; Volund, Rune
    Abstract: We consider a model of Bertrand competition where consumers are uncertain about the qualities and prices of firms' products. Consumers can inspect all products at zero cost. A share of consumers is expectation-based loss averse. For these consumers, a purchase plan, which involves buying products of varying quality and price with positive probability, creates scale-dependent disutility from gain-loss sensations. Even if their degree of loss aversion is modest, they may refrain from inspecting all products and choose an individual default that is first-order stochastically dominated. Firms' strategic behavior can exacerbate the scope for this "uncertainty effect", and sellers of inferior products may earn positive profits despite Bertrand competition. We find suggestive evidence for the predicted association between consumer behavior and loss aversion in new survey data.
    Keywords: Competition; consumer search; loss aversion
    JEL: D21 D83 L41
    Date: 2021–03
  9. By: Loic Berger (CNRS, IESEG School of Management, Univ. Lille, UMR 9221-LEM, F-59000 Lille, France); Louis Eeckhoudt (IESEG School of Management, UMR 9221-LEM, F-59000 Lille, France)
    Abstract: Diversification is a basic economic principle that helps to hedge against uncertainty. It is therefore intuitive that both risk aversion and ambiguity aversion should positively affect the value of diversification. In this paper, we show that this intuition (1) is true for risk aversionbut (2) is not necessarily true for ambiguity aversion. We derive sufficient conditions, showing that, contrary to the economic intuition, ambiguity and ambiguity aversion may actually reduce the diversification value.
    Keywords: Diversification, ambiguity aversion, model uncertainty, hedging
    JEL: D81
    Date: 2021–04
  10. By: Choné, Philippe; Linnemer, Laurent; Vergé, Thibaud
    Abstract: Asymmetric information in procurement entails double marginalization. The phenomenon is most severe when the buyer has all the bargaining power at the production stage, while it vanishes when the buyer and suppliers' weights are balanced. Vertical integration eliminates double marginalization and reduces the likelihood that the buyer purchases from independent suppliers. Conditional on market foreclosure, the probability that final consumers are harmed is positive only if the buyer has more bargaining power when selecting suppliers than when negotiating over prices and quantities. Otherwise, the buyer's and consumers' interests are aligned.
    Keywords: Asymmetric information; Bargaining; Double marginalization; Optimal procurement mechanism; Vertical merger
    JEL: D4 D8 L1 L4
    Date: 2021–02
  11. By: Loic Berger (CNRS, IESEG School of Management, Univ. Lille, UMR 9221–LEM, F-59000 Lille, France; and Bocconi University, Italy)
    Abstract: This paper reflects on the notion of partial ambiguity. Using a framework de-composing ambiguity into distinct layers of analysis, among which are risk and model uncertainty, and allowing for different attitudes toward these layers, I show that partial ambiguity may prove less desirable thanfull ambiguity, even under ambiguity aversion. This observation poses difficulties for interpreting the notion of partial ambiguity in relation to the partial information available to determine the potential compositions of an ambiguous urn. Two Ellsberg-style thought experiments are described to challenge the meaning of partial ambiguity further, and an alternative interpretation, based on a more ambiguous relation, is discussed.
    Keywords: Ambiguity, model uncertainty, smooth ambiguity aversion, Ellsberg para-dox
    JEL: D81
    Date: 2021–04
  12. By: Yeon-Koo Che; Weijie Zhong
    Abstract: We study robustly-optimal mechanisms for selling multiple items. The seller maximizes revenue against a worst-case distribution of a buyer's valuations within a set of distributions, called an "ambiguity" set. We identify the exact forms of robustly-optimal selling mechanisms and the worst-case distributions when the ambiguity set satisfies a variety of moment conditions on the values of subsets of goods. We also identify general properties of the ambiguity set that lead to the robust optimality of partial bundling which includes separate sales and pure bundling as special cases.
    Date: 2021–05
  13. By: Dino Gerardi; Edoardo Grillo; Ignacio Monzón
    Abstract: In democratic societies, politicians craft reform proposals which are then subject to the scrutiny of external authorities. Politicians want their proposals approved and can work to improve their quality. Authorities have their own agendas: they may be in favor or against the reforms under their scrutiny. We study how the authority’s agenda affects the likelihood that a reform is approved and its quality. We show that an authority in favor of a reform can be detrimental towards its approval. This happens when it is easy to incentivize the politician’s work and the status quo alternative is not too attractive.
    Keywords: information transmission, moral hazard, oversight, persuasion
    JEL: D72 D73 D82 D83
    Date: 2020
  14. By: Asker, John; Baccara, Mariagiovanna; Lee, SangMok
    Abstract: Auctioneers of patents are observed to allow joint bidding by coalitions of buyers. These auctions are distinguished from standard ones by the patents being non-rivalrous, but still excludable, in consumption--that is, they are club goods. This affects the way 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 per se 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. We show that 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.
    Keywords: asymmetric auctions; Club goods; Intellectual Property; patents
    JEL: D44 D47 K1 L14
    Date: 2021–01
  15. By: Chaigneau, Pierre; Edmans, Alex; Gottlieb, Daniel
    Abstract: The informativeness principle demonstrates that a contract should depend on informative signals. This paper studies how it should do so. Signals that indicate the output distribution has shifted to the left (e.g. weak industry performance) reduce the threshold for the manager to be paid; those that indicate output is a precise measure of effort (e.g. low volatility) decrease high thresholds and increase low thresholds. Surprisingly, "good" signals of performance need not reduce the threshold. Applying our model to performance-based vesting, we show that performance measures should affect the strike price rather than the number of vesting options, contrary to practice.
    Keywords: Informativeness principle; limited liability; option repricing; Pay-for-luck; performance-based vesting; performance-sensitive debt
    JEL: D86 G32 G34 J33
    Date: 2021–02
  16. By: Johnson, Justin; Rhodes, Andrew
    Abstract: We investigate mergers in markets where quality differences between products are central and firms may reposition their product lines by adding or removing products of different qualities following a merger. Such mergers are materially different from those studied in the existing literature. Mergers without synergies may exhibit a product-mix effect which raises consumer surplus, but only when the pre-merger industry structure satisfies certain observable features. Post-merger synergies may lower consumer surplus. The level of, and changes in, the Herfindahl-Hirschman Index may give a misleading assessment of how a merger affects consumers. A merger may benefit some outsiders but harm others.
    Date: 2021–02
  17. By: Kets, Willemien (University of Oxford)
    Abstract: A standard assumption in game theory is that players have an infinite depth of reasoning: they think about what others think and about what others think that othersthink, and so on, ad infinitum. However, in practice, players may have a finite depth of reasoning. For example, a player may reason about what other players think, but not about what others think he thinks. This paper proposes a class of type spaces that generalizes the type space formalism due to Harsanyi (1967) so that it can model players with an arbitrary depth of reasoning. I show that the type space formalism does not impose any restrictions on the belief hierarchies that can be modeled, thus generalizing the classic result of Mertens and Zamir (1985). However, there is no universal type space that contains all type spaces.
    Date: 2021–04–24
  18. By: Gonnot, Jerome; Seabright, Paul
    Abstract: This paper explores why voters might vote for candidates who espouse extreme policies that voters do not support or behave in ways that they do not approve. We develop a model in which these policies and behaviors serve as signals that the candidates are outsiders to the political establishment, and therefore more likely than Establishment candidates to implement economic policies that are congruent with voters' interests. Establishment candidates seeking election may therefore choose an extreme social platform or indulge in offensive behavior for \textit{populist} reasons - that is, as a way of signaling independence from the interests of the Establishment. This populist strategy is more likely when the value of social policies as signals of future economic policy outweighs their value as signals of future social policies, when voters' trust in economic and social policy announcements is low, when the cost for candidates of breaking campaign promises once elected is low, and when there exist few alternative ways for the voters to predict future policies. We present empirical support from the US and Europe for the main prediction of the model that liberal voters are more likely to vote for social outsiders when they have lower levels of trust in politicians.
    Keywords: median voter model; populism
    JEL: D72 D78 D81
    Date: 2021–03
  19. By: Mohsen Foroughifar; David Soberman
    Abstract: Consumers often resort to third-party information such as word of mouth, testimonials and reviews to learn more about the quality of a new product. However, it may be difficult for consumers to assess the precision of such information. We use a monopoly setting to investigate how the precision of third-party information and consumers' ability to recognize precision impact firm profits. Conventional wisdom suggests that when a firm is high quality, it should prefer a market where consumers are better at recognizing precise signals. Yet in a broad range of conditions, we show that when the firm is high quality, it is more profitable to sell to consumers who do not recognize precise signals. Given the ability of consumers to assess precision, we show a low quality firm always suffers from more precise information. However, a high quality firm can also suffer from more precise information. The precision range in which a high quality firm gains or suffers from better information depends on how skilled consumers are at recognizing precision.
    Date: 2021–05
  20. By: Fernández-Villaverde, Jesús; Mandelman, Federico; Yu, Yang; Zanetti, Francesco
    Abstract: This paper develops a dynamic general equilibrium model with heterogeneous firms that face search complementarities in the formation of vendor contracts. Search complementarities amplify small differences in productivity among firms. Market concentration fosters monopsony power in the labor market, magnifying profits and further enhancing high-productivity firms' output share. Firms want to get bigger and hire more workers, in stark contrast with the classic monopsony model, where a firm aims to reduce the amount of labor it hires. The combination of search complementarities and monopsony power induces a strong ``Matthew effect'' that endogenously generates superstar firms out of uniform idiosyncratic productivity distributions. Reductions in search costs increase market concentration, lower the labor income share, and increase wage inequality.
    Keywords: Market concentration; Monopsony Power; search complementarities; Superstar Firms
    JEL: C63 C68 E32 E37 E44 G12
    Date: 2021–02

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