nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒07‒12
23 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Hidden Testing and Selective Disclosure of Evidence By Claudia Herresthal
  2. Psychological Nash Equilibria under Ambiguity By Giuseppe De Marco; Maria Romaniello; Alba Roviello
  3. Horizontal Mergers under Bertrand Competition By X. Henry Wang; Jingang Zhao
  4. Consumer Information and the Limits to Competition By Armstrong, Mark; Zhou, Jidong
  5. Behavior-Based Personalized Pricing: When Firms Can Share Customer Information By Chongwoo Choe; Noriaki Matsushima; Mark J. Tremblay
  6. Optimal Voting Mechanisms on Generalized Single-Peaked Domains By Tobias Rachidi
  7. Patterns of Competitive Interaction By Armstrong, Mark; Vickers, John
  8. Matching with externalities By Marek Pycia; M. Bumin Yenmez
  9. A theory of simplicity in games and mechanism design By Marek Pycia; Peter Troyan
  10. Optimal object assignment mechanisms with imperfect type veri?cation By Francisco Silva; Juan Pereyra
  11. The Equivalence Between Sequential and Simultaneous Firm Decisions By Francisco Silva; Samir Mamadehussene
  12. Keeping the Agents in the Dark: Private Disclosures in Competing Mechanisms By Attar, Andrea; Campioni, Eloisa; Mariotti, Thomas; Pavan, Alessandro
  13. Advance Selling in the Wake of Entry By Nadia Ceschi; Marc Möller
  14. Price Competition Online: Branded Websites, Marketplace Selling and Price Competition By Oksana Loginova
  15. Cost-benefit analysis in reasoning: The value-of-information case with forward-looking agent By Larbi Alaoui; Antonio Penta
  16. Delegation to a Group By Fehrler, Sebastian; Janas, Moritz
  17. On the Foundations of Competitive Search Equilibrium with and without Market Makers By James Albrecht; Xiaoming Cai; Pieter A. Gautier; Susan Vroman
  18. Downstream new product development and upstream process innovation By Akio Kawasaki; Tomomichi Mizuno; Kazuhiro Takauchi
  19. An informational Ponzi-scheme By Francisco Silva
  20. Reference Dependence and Random Attention By Matthew Kovach; Elchin Suleymanov
  21. Product Differentiation and Equilibrium Price with Partial Product Search By Lin Liu; X. Henry Wang
  22. Should the government provide public goods if it cannot commit? By Francisco Silva
  23. Who matters in dynamic coordination problems? By Guimaraes, Bernardo; Jardanovski, Gabriel

  1. By: Claudia Herresthal
    Abstract: An agent can sequentially run informative tests about an unknown state and disclose (some or all) outcomes to a decision maker who then faces an approval choice. Players agree on the optimal choice under certainty, but the decision maker has a higher approval threshold than the agent. I compare the case where testing is hidden and the agent chooses which test outcomes to verifiably disclose to the case where testing is observable. When testing is observable, I show that the agent may strategically stop testing even if further tests could yield a mutual benefit. I find conditions under which the decision maker is strictly better off under hidden testing and in some equilibria both players are strictly better off under hidden testing than in the unique equilibrium under observable testing.
    Keywords: endogenous information acquisition, verifiable disclosure, transparency, questionable research practices
    JEL: D83 D82
    Date: 2020–01
  2. By: Giuseppe De Marco (Università di Napoli Parthenope, Università di Napoli Federico II and CSEF); Maria Romaniello (Università della Campania Luigi Vanvitelli); Alba Roviello (Università della Campania Luigi Vanvitelli)
    Abstract: Psychological games aim to represent situations in which players have belief-dependent motivations or believe that their opponents have belief-dependent motivations. In this setting, utility functions are directly dependent on the entire hierarchy of beliefs of each player. On the other hand, the literature on strategic ambiguity in classical games highlights that players may have ambiguous (or imprecise) beliefs about opponents' strategy choices. In this paper, we look at the issue of strategic ambiguity in the framework of psychological games by taking into account ambiguous hierarchies of beliefs and we study the natural generalization of the psychological Nash equilibrium concept to this framework. We give an existence result for this new concept of equilibrium and provide examples that show that even an infinitesimal amount of ambiguity may alter significantly the equilibria of the game or can work as an equilibrium selection device. Finally, we look at the problem of stability of psychological equilibria with respect to ambiguous trembles on the entire hierarchy of correct beliefs and we provide a limit result that gives conditions so that sequences of psychological equilibria under ambiguous perturbation converge to psychological equilibria of the unperturbed game.
    Keywords: Psychological Games, Ambiguous Beliefs, Equilibrium Existence, Equilibrium Selection.
    Date: 2021–06–28
  3. By: X. Henry Wang (Department of Economics, University of Missouri); Jingang Zhao (Economics Department, University of Saskatchewan)
    Abstract: This paper draws on recent results from the study of hybrid games and multi-product oligopolies to analyze horizontal mergers under Bertrand competition. We identify a set of linear Bertrand models in which a horizontal merger will reduce both the outsiders' profits and consumer surplus when the insiders' cost savings are sufficiently large. We also show that mergers in Bertrand models will normally increase the insiders' profits even without generating any cost-savings. Such results suggest that the increase in the insiders' profits may arise at the expense of rival firms and consumers, and thus raise new concerns about the anti-competitive effects of mergers under price competition.
    Keywords: Horizontal merger, Bertrand competition, consumer surplus
    JEL: D43 L13 L41
    Date: 2021
  4. By: Armstrong, Mark; Zhou, Jidong
    Abstract: This paper studies competition between firms when consumers observe a private signal of their preferences over products. Within the class of signal structures which induce pure-strategy pricing equilibria, we derive signal structures which are optimal for firms and those which are optimal for consumers. The firm-optimal policy amplifies underlying product differentiation, thereby relaxing competition, while ensuring consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal policy dampens differentiation, which intensifies competition, but induces some consumers to buy their less-preferred product. Our analysis sheds light on the limits to competition when the information possessed by consumers can be designed flexibly.
    Keywords: Information design, Bertrand competition, product differentiation, online platforms
    JEL: D43 D47 D8 L13 L15
    Date: 2021–06
  5. By: Chongwoo Choe; Noriaki Matsushima; Mark J. Tremblay
    Abstract: We study a model of behavior-based price discrimination where asymmetric firms can agree to share customer information that can be used for personalized pricing. We show that information sharing is individually rational for firms as it softens upfront competition when information is gathered, consumers are worse off as a result, but total surplus can increase thanks to the improved quality of matching between firms and consumers. These findings are robust to firm asymmetries and varying discount factors for consumers and firms.
    Date: 2020–03
  6. By: Tobias Rachidi
    Abstract: This paper studies the design of voting mechanisms in a setting with more than two alternatives and voters who have generalized single-peaked preferences derived from median spaces as introduced in [Nehring and Puppe, 2007b]. This class of preferences is considerably larger than the well-known class of preferences that are single-peaked on a line. I characterize the voting rules that maximize the ex-ante utilitarian welfare among all social choice functions satisfying strategy-proofness, anonymity, and surjectivity. The optimal mechanism takes the form of voting by properties, that is, the social choice is determined through a collection of binary votes on subsets of alternatives involving qualified majority requirements that reflect the characteristics of these subsets of alternatives. This general optimality result is applied to the design of voting mechanisms for the provision of two costly public goods subject to the constraint that the provided level of one good is weakly higher than the provided level of the other good.
    Keywords: Voting; Generalized Single-Peaked Preferences; Mechanism Design
    JEL: D71 D72 D82
    Date: 2021–06
  7. 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. However, increased competition (either by entry of by increased consumer awareness) does not always benefit 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 the contrasting equilibrium patterns of price competition for all patterns of consideration in the three-firm case.
    Keywords: Price competition, consideration sets, price dispersion, entry and merger.
    JEL: C72 D43 D83 L13 L4
    Date: 2021–05
  8. By: Marek Pycia; M. Bumin Yenmez
    Abstract: We incorporate externalities into the stable matching theory of two-sided markets. Extending the classical substitutes condition to markets with externalities, we establish that stable matchings exist when agent choices satisfy substitutability. We show that substitutability is a necessary condition for the existence of a stable matching in a maximal-domain sense and provide a characterization of substitutable choice functions. In addition, we extend the standard insights of matching theory, like the existence of side-optimal stable matchings and the deferred acceptance algorithm, to settings with externalities even though the standard fixed-point techniques do not apply.
    Keywords: Matching, externalities, two-sided matching, matching with contracts, stable matching, labor markets, deferred acceptance, substitutes
    JEL: C78 D47 D50 D62 D86
    Date: 2021–06
  9. By: Marek Pycia; Peter Troyan
    Abstract: We introduce a general class of simplicity standards that vary the foresight abilities required of agents in extensive-form games. Rather than planning for the entire future of a game, agents are presumed to be able to plan only for those histories they view as simple from their current perspective. Agents may update their so-called strategic plan as the game progresses, and, at any point, for the called-for action to be simply dominant, it must lead to unambiguously better outcomes, no matter what occurs at non-simple histories. We use our gradated approach to simplicity to provide characterizations of simple mechanisms. While more demanding simplicity standards may reduce the flexibility of the designer in some cases, this is not always true, and many well-known mechanisms are simple, including ascending auctions, posted prices, and serial dictatorship-style mechanisms. In particular, we explain the widespread popularity of the well-known Random Priority mechanism by characterizing it as the unique mechanism that is efficient, fair, and simple to play.
    Keywords: Simplicity, simple dominance, limited foresight, obvious dominance, strongly obvious dominance, market design, mechanism design, extensive-form games, auctions, allocation
    JEL: C72 C78 D01 D02 D44 D47 D82
    Date: 2021–06
  10. By: Francisco Silva; Juan Pereyra
    Abstract: There are objects of di?erent quality to be assigned to agents. Agents can be assigned at most one object and there are not enough high quality objects for every agent. The social planner is unable to use transfers to give incentives for agents to convey their private information; instead, she is able to imperfectly verify their reports. We characterize a mechanism that maximizes welfare, where agents face di?erent lotteries over the various objects, depending on their report. We then apply our main result to the case of college admissions. We ?nd that optimal mechanisms are, in general, ex-post ine?cient and do strictly better than the standard mechanisms that are typically studied in the matching literature.
    Date: 2020
  11. By: Francisco Silva; Samir Mamadehussene
    Abstract: When ?rms compete by choosing two strategic variables (e.g. quality and price), the timing under which ?rms make their decisions (simultaneous vs sequential choice of the strategic variables) plays a critical role, as the equilibrium may be drastically di?erent depending on the timing that is assumed. We rely on the marketing and psychology literatures that provide well-established evidence that consumers do not consider all products in a market, i.e. consumers form “consideration sets”. Under this assumption, we ?nd that in markets where (i) ?rms’ strategies do not in?uence the consideration set formation, and (ii) ?rms are su?ciently uncertain regarding the rivals that each consumer considers, the equilibrium of the game in which ?rms choose the strategic variables sequentially is close to the equilibrium of the simultaneous game. Moreover, the equilibrium of the simultaneous game does not depend on whether or not consumers consider all available alternatives. Therefore, we argue that the analysis of these markets can be performed with standard models provided that the simultaneous timing is used (even if ?rms make their decisions sequentially).
    Date: 2020
  12. By: Attar, Andrea; Campioni, Eloisa; Mariotti, Thomas; Pavan, Alessandro
    Abstract: We study games in which several principals contract with several privately-informed agents. We show that enabling the principals to engage in contractible private disclosures – by sending private signals to the agents about how the mechanisms will respond to the agents’ messages – can significantly affect the predictions of such games. Our first result shows that private disclosures may generate equilibrium outcomes that cannot be supported in any game without private disclosures, no matter the richness of the message spaces and the availability of public randomizing devices. The result thus challenges the canonicity of the universal mechanisms of Epstein and Peters (1999). Our second result shows that equilibrium outcomes of games without private disclosures need not be sustainable when private disclosures are allowed. The result thus challenges the robustness of the “folk theorems” of Yamashita (2010) and Peters and Troncoso-Valverde (2013). These findings call for a novel approach to the analysis of competing-mechanism games.
    Keywords: Incomplete Information; Competing Mechanisms; Private Disclosures;; Signals; Universal Mechanisms; Folk Theorems
    JEL: D82
    Date: 2021–06
  13. By: Nadia Ceschi; Marc Möller
    Abstract: This article provides a tractable model of inter-temporal price-discrimination by heterogeneous firms, imperative for our understanding of advance purchase markets in the wake of entry. The pricing schedule of a more efficient entrant is found to differ systematically from the pricing schedule of a more prominent incumbent. By diverting competition to a stage where consumers face uncertainty about their preferences, advance selling reduces prices while increasing the entrant’s market share and profitability relative to the incumbent. Policies that curtail the firms’ ability to sell in advance, although potentially beneficial for welfare, may have the adverse effects of consolidating an incumbent’s position and of reducing the consumers’ surplus.
    Keywords: Competition, Price Discrimination, Individual Demand Uncertainty, Advance Purchase Discounts.
    JEL: D43 D80 L13
    Date: 2021–06
  14. By: Oksana Loginova (Department of Economics, University of Missouri)
    Abstract: I consider a market for differentiated products with an online marketplace (the platform) and two types of firms. Marketplace firms sell through the platform. Branded firms sell to consumers directly and, if they choose so, through the platform. When a branded firm joins the platform, the firm expands its reach beyond its branded website/physical store(s) to consumers who visit the platform for all their purchases. The drawback is that the firm has to pay a referral fee for all sales on the platform, some of which are from its loyal consumers who would otherwise have purchased from the firm directly. I investigate the role of the firm composition in determining the equilibrium outcome. Interestingly, a higher fraction of branded firms translates into more firms on the platform and intense price competition. In the midst of the COVID-19 pandemic consumers who used to shop at physical stores turn to the platform. I show that if they do (do not) look into other products, more (fewer) branded firms will join the platform in equilibrium.
    Keywords: pricing, competition, online marketplace, platform, brands
    JEL: C72 D43 L11 L13 M31
    Date: 2021
  15. By: Larbi Alaoui; Antonio Penta
    Abstract: We extend the baseline setting in Alaoui and Penta (2018) to provide the representation of the cost-benefit analysis in reaoning of a (non-myopic) forward looking agent who anticipates his future steps of reasoning to take the form of a partitional information structure evaluated in a Bayesian-consistent way
    Keywords: cognition and incentives, choice theory, reasoning, fact-free learning, sequential heuristics, value of information, forward looking, Bayesin consistency
    JEL: D01 D03 D80 D83
    Date: 2021–07
  16. By: Fehrler, Sebastian (University of Bremen); Janas, Moritz (University of Konstanz)
    Abstract: We study the choice of a principal to either delegate a decision to a group of careerist experts, or to consult them individually and keep the decision-making power. Our model predicts a trade-off between information acquisition and information aggregation. On the one hand, the expected benefit from being informed is larger in case the experts are consulted individually. Hence, the experts either acquire the same or a larger amount of information, depending on the cost of information, than in case of delegation. On the other hand, any acquired information is better aggregated in case of delegation, where experts can deliberate secretly. To test the model's key predictions, we run an experiment. The results from the laboratory confirm the predicted trade-off, despite some deviations from theory on the individual level.
    Keywords: delegation, decision rights, committees, group decision-making, expert advice, strategic communication
    JEL: C92 D23 D71
    Date: 2021–05
  17. By: James Albrecht; Xiaoming Cai; Pieter A. Gautier; Susan Vroman
    Abstract: The literature offers two foundations for competitive search equilibrium, a Nash approach and a market-maker approach. When each buyer visits only one seller (or each worker makes only one job application), the two approaches are equivalent. However, when each buyer visits multiple sellers, this equivalence can break down. Our paper analyzes competitive search equilibrium with simultaneous search using the two approaches. We consider four cases defined by (i) the surplus structure (are the goods substitutes or complements?) and (ii) the mechanism space (do sellers post fees or prices?). With fees, the two approaches yield the same constrained efficient equilib-rium. With prices, the equilibrium allocation is the same using both approaches if the goods are complements, but is not constrained efficient. In the case in which only prices are posted and the goods are substitutes, the equilibrium allocations from the two approaches are different.
    Keywords: multiple applications, competitive search, market makers, efficiency
    JEL: C78 D44 D83
    Date: 2021
  18. By: Akio Kawasaki (Faculty of Economics, Oita University); Tomomichi Mizuno (Graduate School of Economics, Kobe University); Kazuhiro Takauchi (Faculty of Business and Commerce, Kansai University)
    Abstract: It is well known that when a rival introduces a new product, a firm's response is affected by conflicting factors. For example, a certain factor stimulates firms to introduce their new products in a quick and retaliatory manner if their rivals introduce new products. Based on this fact, we build a simple vertical relation model: two downstream firms decide whether to introduce a horizontally differentiated new product, whereas a single upstream supplier invests in cost-reducing research and development (R&D). We show that the equilibrium of downstream innovation depends on upstream efficiency. If upstream R&D efficiency is high, downstream innovation is a strategic complement; this corresponds to the scenario in which downstream firms act in a retaliatory manner against their rivals introducing new products. Conversely, if upstream efficiency is low, downstream innovation is a strategic substitute: this implies that downstream firms behave passively when their rivals introduce new products. We also find that upstream R&D efficiency works similarly to the R&D spillover parameter in the d'Aspremont and Jacquemin's (1988) model. When R&D spillover is high (low), the firm's innovation behavior is a strategic complement (substitute). Hence, we offer a new insight into the innovation literature.
    Date: 2021–06
  19. By: Francisco Silva
    Abstract: I show how "experts" who have no intrinsic ability or knowledge are able to sustain a permanent reputation that they do, even in a world where agents have rational expectations and access to an unlimited amount of data about the experts predicting ability. The claim of having such knowledge attracts clients to the expert, allowing the expert to have access to the inside information they provide. That information can then be used by the expert to back up that claim.
    Date: 2020
  20. By: Matthew Kovach; Elchin Suleymanov
    Abstract: We explore the ways that a reference point may direct attention. Utilizing a stochastic choice framework, we provide behavioral foundations for the Reference- Dependent Random Attention Model (RD-RAM). Our characterization result shows that preferences may be uniquely identified even when the attention process depends arbitrarily on both the menu and the reference point. The RD-RAM is able to capture rich behavioral patterns, including frequency reversals among non-status quo alternatives and choice overload. We also analyze specific attention processes, characterizing reference-dependent versions of several prominent models of stochastic consideration.
    Date: 2021–06
  21. By: Lin Liu (College of Business, University of Central Florida); X. Henry Wang (Department of Economics, University of Missouri)
    Abstract: According to earlier economics literature, an increase in product differentiation increases firms' prices. Anderson and Renault (1999), however, show that when search cost is needed to evaluate any product, a U-shaped relationship exists between firms' equilibrium prices and product differentiation. Such a relationship emerges because an increase in product differentiation brings in a positive direct effect on price through increasing market power and a negative indirect effect through encouraging search across firms. In this paper, we revisit this important issue with the recent development of partial-depth search, which allows consumers to evaluate a subset of product attributes. We use a simultaneous search model, and our results show that a U-shaped relationship still emerges in equilibrium when search depth is fixed and dictated by the search environment but vanishes when depth is chosen by consumers. Specifically, in the latter eventuality with endogenous depth, an increase in product differentiation creates a second indirect effect which is positive on price through a greater search depth: a higher differentiation increases the expected search benefit and thus induces consumers to search products at a greater depth, which allows them to better differentiate products and thus softens competition. This new positive indirect effect combined with the conventional positive direct effect leads firms' equilibrium prices to increase with product differentiation.
    Keywords: Search, Partial-search depth, Price, Product differentiation, Competition
    JEL: D43 D83 L13
    Date: 2021
  22. By: Francisco Silva
    Abstract: I compare two di/erent systems of provision of binary public goods: a centralized system, ruled by a benevolent dictator who has limited commitment power; and a decentralized system, based on voluntary contributions, where agents can communicate but cannot write contracts. I show that any ex-post individually rational allocation that is implementable by the centralized system is also imple mentable by the decentralized system. This suggests that when the public good provision problem is merely an informational one, as is the case with binary public goods, a decentralized system may perform better.
    Date: 2020
  23. By: Guimaraes, Bernardo; Jardanovski, Gabriel
    Abstract: This paper studies a dynamic coordination model with timing frictions and heterogeneity in several dimensions. Each agent might a ect and be a ected by others in di erent ways, and the frequency of their decisions might di er. There is a unique equilibrium in the model. At times, the economy might be stuck in an ine cient low-output equilibrium, and subsidies can improve welfare. The optimal subsidy does not depend on each type's timing frictions: at each point in time, the planner should simply compensate each agent for its externality on others at that particular moment.
    Date: 2021–07–02

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