nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒07‒19
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. A Theory of Ex Post Rationalization By Erik Eyster; Shengwu Li; Sarah Ridout
  2. Robust Decision-Making Under Risk and Ambiguity By Maximilian Blesch; Philipp Eisenhauer
  3. Fake Reviews and Naive Consumers By Boris Knapp
  4. Cost-Benefit Analysis in Reasoning: The Value-of-Information Case with Forward-Looking Agent By Larbi Alaoui; Antonio Penta
  5. Dynamic Preference “Reversals” and Time Inconsistency By Philipp Strack; Dmitry Taubinsky
  6. Can personalized pricing be a winning strategy in oligopolistic markets with heterogeneous demand customers? Yes, it can. By Rosa-Branca Esteves
  7. Price Competition Online: Platforms vs. Branded Websites By Oksana Loginova
  8. Uncertainty-driven symmetry-breaking and stochastic stability in a generic differential game of lobbying By Raoul Bouccekine; Fabien Prieur; Weihua Ruan; Benteng Zou
  9. The Near Miss Effect and the Framing of Lotteries By Michael Crystal
  10. Farsighted Objections and Maximality in One-to-one Matching Problems By Kimya, Mert
  11. Reduced-Form Allocations for Multiple Indivisible Objects under Constraints By Xu Lang; Zaifu Yang
  12. The Impact of Multi-homing in a Ride-Hailing Market By Oksana Loginova; X. Henry Wang; Qihong Liu
  13. A Concavification Approach to Ambiguous Persuasion By Xiaoyu Cheng
  14. Micro-level dynamics in hidden action situations with limited information By Stephan Leitner; Friederike Wall
  15. On the Impact of Information Acquisition and Aftermarkets on Auction Efficiency By Moshe Babaioff; Nicole Immorlica; Yingkai Li; Brendan Lucier
  16. Information Aggregation with Delegation of Votes By Dhillon, Amrita; Kotsialou, Grammateia; Xefteris, Dimitris
  17. On the Foundations of Competitive Search Equilibrium with and without Market Maker By James Albrecht; Xiaoming Cai; Pieter Gautier; Susan Vroman
  18. Colonel Blotto's Tug of War By Klumpp, Tilman

  1. By: Erik Eyster; Shengwu Li; Sarah Ridout
    Abstract: Human beings attempt to rationalize their past choices, even those that were mistakes in hindsight. We propose a formal theory of this behavior. The theory predicts that agents commit the sunk-cost fallacy. Its model primitives are identified by choice behavior and it yields tractable comparative statics.
    Date: 2021–07
  2. By: Maximilian Blesch (Berlin School of Economics); Philipp Eisenhauer (University of Bonn)
    Abstract: Economists often estimate a subset of their model parameters outside the model and let the decision-makers inside the model treat these point estimates as-if they are correct. This practice ignores model ambiguity, opens the door for misspecification of the decision problem, and leads to post-decision disappointment. We develop a framework to explore, evaluate, and optimize decision rules that explicitly account for the uncertainty in the first step estimation using statistical decision theory. We show how to operationalize our analysis by studying a stochastic dynamic investment model where the decision-makers take ambiguity about the model's transition dynamics directly into account.
    Keywords: decision-making under uncertainty, robust Markov decision process
    JEL: D81 C44 D25
    Date: 2021–07
  3. By: Boris Knapp
    Abstract: User-generated reviews like those found on Amazon, Yelp, and similar platforms have become an important source of information for most consumers nowadays. It is therefore tempting for firms to manipulate reviews in order to increase demand for their products - but not all consumers are aware of this. We show that in a simple model with fake reviews and naive consumers the unique equilibrium is characterised by partial pooling, where fake reviews blend in with real ones and are persuasive. Policies that reduce the share of naive consumers have opposing effects on the two consumer groups: naives benefit, while sophisticates are harmed. A policy maker concerned with aggregate consumer welfare is thus facing a non-trivial problem. We further show that when real reviews are written strategically, they are not always truthful. Given sufficiently favourable market conditions, the equilibrium where all real reviewers are strategic is outcome equivalent to one where all consumers are sophisticates. In the context of online platforms, where the boundary between consumers and reviewers is fluid, this equivalence result has important practical implications.
    JEL: C72 D82 L15
    Date: 2102–07
  4. 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 reasoning 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, Bayesian consistency
    JEL: D01 D03 D80 D83
    Date: 2021–07
  5. By: Philipp Strack; Dmitry Taubinsky
    Abstract: We study identification of time inconsistency when an agent at time 0 makes an advance commitment, and later at time 1 can revise their choice after possibly receiving additional information. Roughly speaking, we prove that the only data that reject time-consistent expected utility maximization is a time-0 choice that is always strictly dominated at time 1. This holds for rich choice sets; if the complete ranking of alternatives is observed in every period and state; when it is natural to assume additional properties like concavity; and with supplementary cardinal information. However, time inconsistency can be point identified from willingness to pay for different alternatives in both periods, if utility from money is plausibly additively-separable and independent of time-1 information.
    JEL: C9 D0 D9
    Date: 2021–06
  6. By: Rosa-Branca Esteves (NIPE and Economics Department, University of Minho)
    Abstract: This paper aims to understand under what market conditions, can competing symmetric fi rms employ personalized pricing as a winning strategy. A key departure of our paper from the literature is that we introduce customer heterogeneity in demand. If fi rms´data discloses only vertical information (demand heterogeneity), fi rms can only employ group pricing. This is always a winning strategy. When data discloses horizontal information (consumer preferences) and vertical information, perfect personalized pricing (PPP) becomes feasible. If data only discloses horizontal information, fi rms can only employ imperfect personalized pricing (IPP). By comparing uniform pricing (UP) with personalized pricing, we show that if the share of high demand customers in the market is greater than the share of low demand consumers, fi rms are always better off with no discrimination. More importantly, we show that if heterogeneity in purchase quantity is sufficiently high, then personalized pricing can be a winning strategy for all symmetric practice fi rms. If heterogeneity in consumer value is high and the share of high demand consumers is sufficiently low, in comparison to UP, both firms are better off under IPP. For an intermediate share of high demand consumers, firms can get higher profi ts under PPP than under UP and IPP.
    JEL: D43 D80 L13 L40
    Date: 2021
  7. By: Oksana Loginova (Department of Economics, University of Missouri)
    Abstract: The focus of this theoretical study is price competition when some firms operate their own branded website while others sell their products through an online platform, such as Amazon Marketplace. On one hand, selling through Amazon expands a firm's reach to more customers, but on the other hand, starting a website can help the firm to increase the perceived value of its product, that is, to build brand equity. In the short run the composition of firms is fixed, whereas in the long run each firm chooses between Amazon and its own website. I derive the equilibrium prices and profits, analyze the firms' behavior in the long run, and compare the equilibrium outcome with the social optimum. Comparative statics analysis reveals some interesting results. For example, I find that the number of firms that choose Amazon may go down in response to an increase in the total number of firms. A pure-strategy Nash equilibrium may not exist; I show that price dispersion among firms of the same type is more likely in less concentrated markets and/or when the increase in the perceived value of the product is relatively small.
    Keywords: pricing, competition, platforms, online marketplace, Amazon, brand equity
    JEL: C72 D43 L11 L13 M31
    Date: 2021–03–21
  8. By: Raoul Bouccekine (Aix-Marseille Université); Fabien Prieur (Université de Montpellier); Weihua Ruan (Purdue University Northwest); Benteng Zou (Department of Economics and Management, Université du Luxembourg)
    Abstract: We study a 2-players stochastic differential game of lobbying. Players have opposite interests; at any date, each player invests in lobbying activities to alter the legislation, the continuous state variable of the game, in her own benefit. The payoffs are quadratic and uncertainty is driven by a Wiener process. We prove that while a symmetric Markov Perfect Equilibrium (MPE) always exists, (two) asymmetric MPE only emerge when uncertainty is large enough. In the latter case, the legislative state converges to a stationary invariant distribution. We fully characterize existence and stochastic stability of the legislative state for both types of MPE. We finally study the implications for rent dissipation asymptotically. We show in particular that while the average rent dissipation is lower with asymmetric equilibria relative to the symmetric, the former yield larger losses at the most likely asymptotic states for large enough but moderate uncertainty.
    Keywords: Political lobbying, symmetric versus asymmetric equilibrium, stochastic differential games, stochastic stability, social cost of lobbying.
    JEL: D72 C73
    Date: 2021
  9. By: Michael Crystal
    Abstract: We present a framework for analyzing the near miss effect in lotteries. A decision maker (DM) facing a lottery, falsely interprets losing outcomes that are close to winning ones, as a sign that success is within reach. As a result of this false belief, the DM will prefer lotteries that induce a higher frequency of near misses, even if the underlying probability of winning is constant. We define a near miss index that measures the near miss effect induced by a given lottery and analyze the optimal lottery design in terms of near miss. This analysis leads us to establish a fruitful connection between our near miss framework and the field of coding theory. Building on this connection we compare different lottery frames and the near miss effect they induce. Analyzing an interaction between a seller and a buyer of lotteries allows us to gain further insight into the optimal framing of lotteries and might offer a potential explanation as to why lotteries with a very small probability of winning are commonplace and attractive.
    Date: 2021–07
  10. By: Kimya, Mert
    Abstract: We characterize the set of stable matchings when individuals are farsighted and when they choose their objections optimally along a farsighted objection path. We use a solution concept called maximal farsighted set (MFS), which is an adaptation of the concepts developed in Dutta and Vohra (2017) and Dutta and Vartiainen (2020) to one-to-one matching problems. MFS always exists, but it need not be unique. There is a unique largest MFS that contains all other, which is equal to the largest consistent set of Chwe (1994). This implies that the largest consistent set embodies the idea of maximality in one-to-one matching problems.
    Date: 2020–09
  11. By: Xu Lang; Zaifu Yang
    Abstract: We examine the implementation of reduced-form allocation rules that assign multiple indivisible objects to many agents, with incomplete information and distributional constraints across objects and agents. To obtain implementability results, we adopt a lift-and-project approach, which reduces the problem to a problem of enumerating finite generators of a projection cone. We study geometric and combinatorial properties of the projection cone and provide a total unimodularity condition that leads to several characterization results including those on hierarchies and bihierarchies. Our results have applications in matching markets with constraints where agents may have ordinal or cardinal preferences.
    Keywords: Implementation, Reduced-form rules, Indivisible goods, Distributional constraints, Total unimodularity, Incomplete information.
    JEL: D44 C65
    Date: 2021–07
  12. By: Oksana Loginova (Department of Economics, University of Missouri); X. Henry Wang (Department of Economics, University of Missouri); Qihong Liu (Department of Economics, University of Oklahoma)
    Abstract: Platforms such as Uber, Lyft and Airbnb serve two-sided markets with drivers (property owners) on one side and riders (renters) on the other side. Some agents multi-home. In the case of ride-sharing, a driver may drive for both Uber and Lyft, and a rider may use both apps and request a ride from the company that has a driver close by. In this paper, we are interested in welfare implications of multi-homing in such a market. Our model abstracts away from entry/exit by drivers and riders as well as pricing by platforms. Both drivers' and riders' surpluses are determined by the average time between a request and the actual pickup. The benchmark setting is a monopoly platform and the direct comparison is a single-homing duopoly. The former is more efficient since it has a thicker market. Next, we consider two multi-homing settings, multi-homing on the rider side and multi-homing on the driver side. Relative to single-homing duopoly, we find that multi-homing on either side improves the overall welfare. However, multi-homing drivers potentially benefit themselves at the cost of single-homing drivers. In contrast, multi-homing riders benefit themselves as well as single-homing riders, representing a more equitable distribution of gains from multi-homing.
    Keywords: Ride-hailing platform, two-sided markets, network externalities, multi-homing
    JEL: D85 L12 L13
    Date: 2020–10–09
  13. By: Xiaoyu Cheng
    Abstract: This note shows that the value of ambiguous persuasion characterized in Beauchene, Li and Li(2019) can be given by a concavification program as in Bayesian persuasion (Kamenica and Gentzkow, 2011). More specifically, it implies that an ambiguous persuasion game can be equivalently formalized as a Bayesian persuasion game with distorted utility functions. This result is obtained under a novel construction of ambiguous persuasion.
    Date: 2021–06
  14. By: Stephan Leitner; Friederike Wall
    Abstract: The hidden-action model provides an optimal sharing rule for situations in which a principal assigns a task to an agent who makes an effort to carry out the task assigned to him. However, the principal can only observe the task outcome but not the agent's actual action. The hidden-action model builds on somewhat idealized assumptions about the principal's and the agent's capabilities related to information access. We propose an agent-based model that relaxes some of these assumptions. Our analysis lays particular focus on the micro-level dynamics triggered by limited information access. For the principal's sphere, we identify the so-called Sisyphus effect that explains why the optimal sharing rule can generally not be achieved if the information is limited, and we identify factors that moderate this effect. In addition, we analyze the behavioral dynamics in the agent's sphere. We show that the agent might make even more of an effort than optimal under unlimited information, which we refer to as excess effort. Interestingly, the principal can control the probability of making an excess effort via the incentive mechanism. However, how much excess effort the agent finally makes is out of the principal's direct control.
    Date: 2021–07
  15. By: Moshe Babaioff; Nicole Immorlica; Yingkai Li; Brendan Lucier
    Abstract: A common assumption in auction theory is that the information available to the agents is given exogenously and that the auctioneer has full control over the market. In practice, agents might be able to acquire information about their competitors before the auction (by exerting some costly effort), and might be able to resell acquired items in an aftermarket. The auctioneer has no control over those aspects, yet their existence influences agents' strategic behavior and the overall equilibrium welfare can strictly decrease as a result. We show that if an auction is smooth (e.g., first-price auction, all-pay auction), then the corresponding price of anarchy bound due to smoothness continues to hold in any environment with (a) information acquisition on opponents' valuations, and/or (b) an aftermarket satisfying two mild conditions (voluntary participation and weak budget balance). We also consider the special case with two ex ante symmetric bidders, where the first-price auction is known to be efficient in isolation. We show that information acquisition can lead to efficiency loss in this environment, but aftermarkets do not: any equilibrium of a first-price or all-pay auction combined with an aftermarket is still efficient.
    Date: 2021–07
  16. By: Dhillon, Amrita; Kotsialou, Grammateia; Xefteris, Dimitris
    Abstract: Recent developments in blockchain technology have made possible greater progress on secure electronic voting, opening the way to better ways of democratic decision making. In this paper we formalise the features of ``liquid democracy'' which allows voters to delegate their votes to other voters, and we explore whether it improves information aggregation as compared to direct voting. We consider a two-alternative setup with truth-seeking voters (informed and uninformed) and partisan ones (leftists and rightists), and we show that delegation improves information aggregation in finite elections. We also propose a mechanism that further improves the information aggregation properties of delegation in private information settings, by guaranteeing that all vote transfers are from uninformed to informed truth-seeking voters. Delegation offers effective ways for truth-seeking uninformed voters to boost the vote-share of the alternative that matches the state of the world in all considered setups and hence deserves policy makers' attention.
    Date: 2021–01–02
  17. By: James Albrecht (Georgetown University); Xiaoming Cai (Peking University HSBC Business School); Pieter Gautier (Vrije Universiteit Amsterdam); Susan Vroman (Georgetown University)
    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 equilibrium. 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: 2021–07–04
  18. By: Klumpp, Tilman (University of Alberta, Department of Economics)
    Abstract: We examine Tug of War contests with the Blotto specification. Players have fixed effort budgets and must allocate these budgets to a sequence of battles. The outcome of each battle is a function of the efforts allocated to that battle. The player who first wins L more battles than the opponent wins the contest. We prove the one-step deviation principle for the undiscounted version of this game. We then derive a pure strategy, subgame perfect equilibrium for the case where the contest success function that governs each battle is a generalized Tullock function with exponent 1/2 or less. In the equilibrium, the players invest the same percentage of their remaining resources into each battle. The value of this percentage depends on how close each player is to winning the contest. Escalation of efforts, measured in relation to the players' remaining budgets, occurs when the player with the smaller budget is close to winning. At the same time, the probability that a player wins any individual battle remains constant along the entire equilibrium path.
    Keywords: Tug of War games; Colonel Blotto games; sequential contests; multibattle contests
    JEL: D72 D74
    Date: 2021–07–07

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