nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒08‒09
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. The Optimality of Upgrade Pricing By Dirk Bergemann; Alessandro Bonatti; Andreas Haupt; Alex Smolin
  2. Epistemological Implementation of Social Choice Functions By Hitoshi Matsushima
  3. Strategic Pricing and Ratings By Anton Sobolev; Konrad Stahl; André Stenzel; Christoph Wolf
  4. Objective rationality foundations for (dynamic) alpha-MEU By Mira Frick; Ryota Iijima; Yves Le Yaouanq
  5. English Versus Vickrey Auctions With Loss-Averse Bidders By Jonas von Wangenheim
  6. Sampling dynamics and stable mixing in hawk-dove games By Srinivas Arigapudi; Yuval Heller; Amnon Schreiber
  7. Selling Impressions: Efficiency vs. Competition By Dirk Bergemann; Tibor Heumann; Stephen Morris
  8. Information Nudges and Self-Control By Thomas Mariotti; Nikolaus Schweizer; Nora Szech; Jonas von Wangenheim
  9. Dutch vs. First-Price Auctions With Expectations-Based Loss-Averse Bidders By Benjamin Balzer; Antonio Rosato; Jonas von Wangenheim
  10. Monotone Comparative Statics in the Calvert-Wittman Model By Francisco; Eduardo Zambrano
  11. Grouping agents with persistent types By James Malcomson
  12. Uncertainty and Information Sources' Reliability By Gérard Mondello
  13. School Choice and Loss Aversion By Vincent Meisner; Jonas von Wangenheim
  14. Renegotiation and discrimination in symmetric procurement auctions By Leandro Arozamena; Juan José Ganuza; Federico Weinschelbaum
  15. Expected utility maximization with stochastically ordered returns By Romain Gauchon; Karim Barigou
  16. Plea Bargaining and Investigation Effort: Inquisitorial Criminal Procedure as a Three-Player Game By Christmann, Robin
  17. Competitive equilibrium always exists for combinatorial auctions with graphical pricing schemes By Marie-Charlotte Brandenburg; Christian Haase; Ngoc Mai Tran
  18. A Theory of Political Participation By Isa, Berk Orkun; Yucel, Mustafa Eray
  19. Our product is unique: A note on a delegation game with differentiated products By Clemens Buchen; Sven A. Hartmann; Alberto Palermo
  20. Revealing Private Information in a Patent Race By Pavel Kocourek

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Alessandro Bonatti (MIT); Andreas Haupt (Institute for Data, Systems, and Society, MIT); Alex Smolin (Dept. of Economics, Yale University)
    Abstract: We consider a multiproduct monopoly pricing model. We provide sufficient conditions under which the optimal mechanism can be implemented via upgrade pricing—a menu of product bundles that are nested in the strong set order. Our approach exploits duality methods to identify conditions on the distribution of consumer types under which (a) each product is purchased by the same set of buyers as under separate monopoly pricing (though the transfers can be different), and (b) these sets are nested. We exhibit two distinct sets of sufficient conditions. The first set of conditions is given by a weak version of monotonicity of types and virtual values, while maintaining a regularity assumption, i.e., that the product-by-product revenue curves are singlepeaked. The second set of conditions establishes the optimality of upgrade pricing for type spaces with monotone marginal rates of substitution (MRS)—the relative preference ratios for any two products are monotone across types. The monotone MRS condition allows us to relax the earlier regularity assumption. Under both sets of conditions, we fully characterize the product bundles and prices that form the optimal upgrade pricing menu. Finally, we show that, if the consumer’s types are monotone, the seller can equivalently post a vector of single-item prices: upgrade pricing and separate pricing are equivalent.
    Keywords: Revenue Maximization, Mechanism design, Strong duality, Upgrade pricing
    JEL: D42 D82
    Date: 2021–07
  2. By: Hitoshi Matsushima (University of Tokyo)
    Abstract: We investigate the implementation of social choice functions (SCFs) from an epistemological perspective. We consider the possibility that in higher-order beliefs there exists an honest agent who is motivated by intrinsic preference for honesty as well as material interest. We assume weak honesty, in that an honest agent is mostly motivated by material interests and even tells white lies. Importantly, this study assumes that “all agents are selfish†never happens to be common knowledge. We then show the following positive results for the implementability: In complete information environments, with three or more agents, any SCF is uniquely implementable in the Bayesian Nash equilibrium (BNE). In asymmetric information environments, with a minor restriction named information diversity, any incentive-compatible SCF is fully implementable in BNE. An SCF, whether material or nonmaterial (ethical), can be implemented even if all agents are selfish and “all agents are selfish†is mutual knowledge.
    Date: 2021–07
  3. By: Anton Sobolev; Konrad Stahl; André Stenzel; Christoph Wolf
    Abstract: A seller serving two generations of short lived heterogeneous consumers sells a product under uncertain demand. We characterize the seller's optimal pricing, taking into account that the current period's price affects the information transmission to the next period consumers via consumer ratings. While the seller always prefers to generate more information, it is not necessarily in the consumers' interest. We characterize situations in which consumer surplus and welfare are decreasing in additional information. We provide conditions under which aggregate consumer surplus and welfare are lower with than without a rating system.
    Keywords: Online Markets, Rating, Reputation
    JEL: D83 L12 L13 L81
    Date: 2021–07
  4. By: Mira Frick (Cowles Foundation, Yale University); Ryota Iijima (Cowles Foundation, Yale University); Yves Le Yaouanq (Ludwig-Maximilians-Universit‰t, Munich)
    Abstract: We show how incorporating Gilboa, Maccheroni, Marinacci, and Schmeidler's (2010) notion of objective rationality into the alpha-MEU model of choice under ambiguity (Hurwicz, 1951) can overcome several challenges faced by the baseline model without objective rationality. The decision-maker (DM) has a subjectively rational preference $\succsim^\wedge$, which captures the complete ranking over acts the DM expresses when forced to make a choice; in addition, we endow the DM with a (possibly incomplete) objectively rational preference $\succsim^*$, which captures the rankings the DM deems uncontroversial. Under the objectively founded alpha-MEU model, $\succsim^\wedge$ has an alpha-MEU representation and $\succsim^*$ has a unanimity representation à la Bewley (2002), where both representations feature the same utility index and set of beliefs. While the axiomatic foundations of the baseline alpha-MEU model are still not fully understood, we provide a simple characterization of its objectively founded counterpart. Moreover, in contrast with the baseline model, the model parameters are uniquely identified. Finally, we provide axiomatic foundations for prior-by-prior Bayesian updating of the objectively founded alpha-MEU model, while we show that, for the baseline model, standard updating rules can be ill-defined.
    Keywords: Ambiguity, Alpha-MEU, Objective rationality, Updating
    Date: 2020–07
  5. By: Jonas von Wangenheim
    Abstract: Evidence suggests that people evaluate outcomes relative to expectations. I analyze this expectations-based loss aversion à la Köszegi and Rabin in the context of dynamic and static auctions, where the reference point is given by the (endogenous) equilibrium outcome. If agents update their reference point during the auction, the arrival of information crucially affects equilibrium behavior. Consequently, I show that - even with independent private values - the Vickrey auction yields strictly higher revenue than the (ascending clock) English auction, violating the well-known revenue equivalence.
    Keywords: Vickrey auction, English auction, Japanese auction, expectationsbased loss aversion, revenue equivalence, dynamic loss aversion, personal equilibrium
    JEL: D03 D44
    Date: 2021–07
  6. By: Srinivas Arigapudi; Yuval Heller; Amnon Schreiber
    Abstract: The hawk-dove game admits two types of equilibria: an asymmetric pure equilibrium in which players in one population play hawk and players in the other population play dove, and a symmetric mixed equilibrium. The existing literature on dynamic evolutionary models shows that populations will converge to playing one of the asymmetric pure equilibria from any initial state. By contrast, we show that plausible sampling dynamics, in which agents occasionally revise their actions by observing either opponents' behavior or payoffs in a few past interactions, can induce the opposite result: global convergence to a symmetric mixed equilibrium.
    Date: 2021–07
  7. By: Dirk Bergemann (Cowles Foundation, Yale University); Tibor Heumann (Pontificia Universidad Católica de Chile); Stephen Morris (Dept. of Economics, MIT)
    Abstract: In digital advertising, a publisher selling impressions faces a trade-off in deciding how precisely to match advertisers with viewers. A more precise match generates efficiency gains that the publisher can hope to exploit. A coarser match will generate a thicker market and thus more competition. The publisher can control the precision of the match by controlling the amount of information that advertisers have about viewers. We characterize the optimal trade-off when impressions are sold by auction. The publisher pools premium matches for advertisers (when there will be less competition on average) but gives advertisers full information about lower quality matches.
    Keywords: Second Price Auction, Conflation, Digital Advertising, Impressions, Bayesian Persuasion, Information Design
    JEL: D44 D47 D83 D84
    Date: 2021–07
  8. By: Thomas Mariotti; Nikolaus Schweizer; Nora Szech; Jonas von Wangenheim
    Abstract: We study the optimal design of information nudges for present-biased consumers who make sequential consumption decisions without exact prior knowledge of their long-term consequences. For any distribution of risks, there exists a consumer-optimal information nudge that is of cutoff type, recommending abstinence if the risk is high enough. Depending on the distribution of risks, more or less consumers have to be sacrificed, as they cannot be credibly warned even though they would like to be. Under a stronger bias for the present, the target group receiving a credible warning to abstain must be tightened, but this need not increase the probability of harmful consumption. If some consumers are more strongly present-biased than others, traffic-light nudges turn out to be optimal and, when subgroups of consumers differ sufficiently, the optimal traffic-light nudge is also subgroup-optimal. We finally compare the consumer-optimal nudge with those a health authority or a lobbyist would favor.
    Keywords: Nudges, Information Design, Present-Biased Preferences, Self-Control
    JEL: C73 D82
    Date: 2021–07
  9. By: Benjamin Balzer; Antonio Rosato; Jonas von Wangenheim
    Abstract: We study Dutch and fi rst-price auctions with expectations-based loss-averse bidders and show that the strategic equivalence between these formats no longer holds. Intuitively, as the Dutch auction unfolds, a bidder becomes more optimistic about her chances of winning; this stronger "attachment" effect pushes her to bid more aggressively than in the first-price auction. Thus, Dutch auctions raise more revenue than first-price ones. Indeed, the Dutch auction raises the most revenue among standard auction formats. Our results imply that dynamic mechanisms that make bidders more optimistic raise more revenue, thereby ratio- nalizing the use of descending-price mechanisms by sellers in this field.
    Keywords: Loss Aversion, Dutch Auctions, Revenue Equivalence, Personal Equilibrium
    JEL: D44 D81 D82
    Date: 2021–07
  10. By: Francisco (Kellogg Institute for International Studies, University of Notre Dame); Eduardo Zambrano (Department of Economics, California Polytechnic State University)
    Abstract: In this paper, we show that when policy-motivated parties can commit to a particular platform during a uni-dimensional electoral contest where valence issues do not arise there must be a positive association between the policies preferred by candidates and the policies adopted in expectation in the lowest and the highest equilibria of the electoral contest. We also show that this need not be so if the parties cannot commit to a particular policy. The implication is that evidence of a negative relationship between enacted and preferred policies is suggestive of parties that hold positions from which they would like to move from yet are unable to do so.
    Keywords: Credibility and commitment, political competition
    JEL: D72 D78
    Date: 2021
  11. By: James Malcomson
    Abstract: Employees are divided into grades. Toyota places suppliers into only a small number of categories. This paper shows that grouping of privately informed and persistent agent types arises naturally in relational incentive contracts when agent type is continuous. Malcomson (2016) showed that full separation is not possible if, following full revelation of an agent's type, payoffs for principal and agent are on the Pareto frontier.
    Keywords: persistent private information, renegotiation-proofness, type pooling, relational incentive contracts
    Date: 2021–07–26
  12. By: Gérard Mondello (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: This paper studies the impact of the reliability of information sources on choices under ambiguity. Using the Ellsberg's (1961) framework it studies two conjectures. First, the conditions of appearance of the Ellsberg paradox when the information source offers two probable proportions of red and black balls in two urns. Second, the consequence on choices of a non-reliable information source. This source proposes a unique proportion of red and black balls against an unknown one (inside box 1). Thus, either the proportion is correct, or it is unknown (ambiguous). We show that despite le information source unreliability, the decision-maker will trust the given information.
    Keywords: Uncertainty theory, decision theory, ambiguity aversion, Information
    JEL: I10 I18 I19 D80 D81 D83
    Date: 2021–07
  13. By: Vincent Meisner; Jonas von Wangenheim
    Abstract: Evidence suggests that participants in direct student-proposing deferred-acceptance mechanisms (DSPDA) play dominated strategies. To explain the observed data, we introduce expectation-based loss aversion into a school-choice setting and characterize choice-acclimating personal equilibria in DSPDA. We find that non-truthful preference submissions can be strictly optimal if and only if they are top-choice monotone. In equilibrium, DSPDA may implement allocations with justified envy. Specifically, it discriminates against students who are more loss averse or less con- fident than their peers, and amplifies already existing discrimination. To level the playing field, we propose sequential mechanisms as an alternative that is robust to these biases.
    Keywords: Market design, Matching, School choice, Reference-dependent preferences, Loss aversion, Deferred acceptance
    JEL: C78 D47 D78 D81 D82 D91
    Date: 2021–07
  14. By: Leandro Arozamena; Juan José Ganuza; Federico Weinschelbaum
    Abstract: In order to make competition open, fair and transparent, procurement regulations often require equal treatment for all bidders. This paper shows how a favorite supplier can be treated preferentially (opening the door to home bias and corruption) even when explicit discrimination is not allowed. We analyze a procurement setting in which the optimal design of the project to be contracted is unknown. The sponsor has to invest in specifying the project. The larger the investment, the higher the probability that the initial design is optimal. When it is not, a bargaining process between the winning firm and the sponsor takes place. Profits from bargaining are larger for the favorite supplier than for its rivals. Given this comparative advantage, the favored firm bids more aggressively and then, it wins more often than standard firms. Finally, we show that the sponsor invests less in specifying the initial design, when favoritism is stronger. Underinvestment in design specification is a tool for providing a comparative advantage to the favored firm.
    Keywords: auctions, favoritism, auction design, renegotiation, corruption
    JEL: I12 J13 H31 H24
    Date: 2021–07
  15. By: Romain Gauchon (ISFA - Institut de Science Financière et d'Assurances); Karim Barigou (ISFA - Institut de Science Financière et d'Assurances)
    Abstract: Expected utility is an influential theory to study rational choice among risky assets. For each investment, an economic agent expects to receive a random payoff and therefore maximizes its expected utility. To the best of our knowledge, there exists no general procedure to take the derivative of the expected utility as a function of the investment without heavy assumptions on the underlying processes. This article considers expected utility maximization when payoffs are modeled by a family of random variables increasing with investment for the convolution order such as Poisson, Gamma or Exponential distributions. For several common utility functions, with the help of fractional calculus, we manage to obtain closed-form formulas for the expected utility derivative. The paper also provides two economic applications: production of competitive firms and investment in prevention.
    Keywords: Convolution order,Expected utility,Fractional calculus,Prevention
    Date: 2021–07–22
  16. By: Christmann, Robin
    Abstract: We study the impact of plea bargaining on decision errors and operating costs of the inquisitorial justice system. Scholars and legal professionals are divided over whether such plea deals are compatible with the inquisitorial tradition. In this paper, we stylize inquisitorial criminal procedure as a sequential game with two benevolent investigators, judge and prosecutor. Both agents are subject to private investigation costs and seek a correct decision over a defendant of uncertain guilt. Our analysis shows that the introduction of plea deals in courtroom helps to overcome the problem of effort coordination between the two investigating agents. All equilibria that involve a conviction also adhere to the ‘beyond reasonable doubt’-conviction threshold. Moreover, we demonstrate that plea bargaining reduces the frequency of wrongful convictions (type I errors) in inquisitorial procedures.
    Keywords: screening, free-riding, litigation, court errors
    JEL: D82 K14 K41
    Date: 2021–07–30
  17. By: Marie-Charlotte Brandenburg; Christian Haase; Ngoc Mai Tran
    Abstract: We show that a competitive equilibrium always exists in combinatorial auctions with anonymous graphical valuations and pricing, using discrete geometry. This is an intuitive and easy-to-construct class of valuations that can model both complementarity and substitutes, and to our knowledge, it is the first class besides gross substitutes that have guaranteed competitive equilibrium. We prove through counter-examples that our result is tight, and we give explicit algorithms for constructive competitive pricing vectors. We also give extensions to multi-unit combinatorial auctions (also known as product-mix auctions). Combined with theorems on graphical valuations and pricing equilibrium of Candogan, Ozdagar and Parillo, our results indicate that quadratic pricing is a highly practical method to run combinatorial auctions.
    Date: 2021–07
  18. By: Isa, Berk Orkun; Yucel, Mustafa Eray
    Abstract: This paper lays down a mathematical model of political participation where participatory behavior functions as insurance against redistribution of resources. Abstracting a broad notion of political participation to its tangible bene�fits and costs, we elaborate the participatory behavior from the perspectives of Expected Utility and Cumulative Prospect Theory. Our elaboration reveals that the relative degrees of risk aversion and loss aversion yield a multiplicity of equilibria, sheds light on the recently observed absenteeism in political participation and suggest that participation would not increase unless the material domain of politics itself is altered.
    Keywords: Political Participation; Cumulative Prospect Theory; Risk Aversion; Insurance; Lobbying
    JEL: D72 P16
    Date: 2020–07–05
  19. By: Clemens Buchen (WHU – Otto Beisheim School of Management); Sven A. Hartmann (Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University); Alberto Palermo (Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University)
    Abstract: We analyze a Cournot duopoly market with differentiated goods and the separation between ownership and control. We consider a delegation game, for which the owner of a firm hires a manager who acts as if the good has a lower degree of substitutability than it really has. This is so either because managers are biased and perceive the good in this way, or because firms design an incentive scheme accordingly, which leads the manager to act in this way. Both firms rely on delegation. We discuss conditions, which lead one firm to increase its profit implying that the usual result of a prisoners’ dilemma is avoided.
    Keywords: Strategic Delegation, Managerial Incentives, Oligopoly
    JEL: D21 D62 L13
    Date: 2021–02
  20. By: Pavel Kocourek
    Abstract: In this paper I investigate the role of private information in a patent race. Since firms often do their research in secrecy, the common assumption in patent race literature that firms know each other’s position in the race is questionable. I analyze how the dynamics of the game changes when a firm’s progress is its private information, and I address the question whether revealing it might be to a firm’s advantage. I find that a firm has an incentive to reveal its breakthrough only if its rival has not done so, and only if the research is costly.
    Keywords: : Patent Race; R&D Investment; Race; Optimal Effort; Revealing Private Information;
    Date: 2021–07

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