nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒08‒16
sixteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Consumer Search and Choice Overload By Volker Nocke; Patrick Rey
  2. Optimal Delegation and Information Transmission Under Limited Awareness By Sarah Auster; Nicola Pavoni
  3. Communication, Renegotiation and Coordination with Private Values (Extended Version) By Heller, Yuval; Kuzmics, Christoph
  4. Renegotiation and Discrimination in Symmetric Procurement Auctions By Leandro Arozamena; Juan-José Ganuza; Federico Weinschelbaum
  5. Price discrimination with imperfect consumer recognition By Sumit Shrivastav
  6. Optimal Epidemic Control in Equilibrium with Imperfect Testing and Enforcement By Tom Phelan; Alexis Toda
  7. Intermediaries in the Online Advertising Market By Anna D'Annunzio; Antonio Russo
  8. Profitability of behavior based price discrimination By Sumit Shrivastav
  9. Escaping Arrow's Theorem: The Advantage-Standard Model By Wesley H. Holliday; Mikayla Kelley
  10. Creating Controversy in Proxy Voting Advice By Andrey Malenko; Nadya Malenko; Chester S. Spatt
  11. A Buyer Power Theory of Exclusive Dealing and Exclusionary Bundling By Claire Chambolle; Hugo Molina
  12. Strategic delegation in spatial price discrimination mixed duopoly; Nash is consistent at the presence of a public firm By Michelacakis, Nickolas
  13. Unweighted Condorcet Jury Theorem and Miracle of Aggregation do not hold almost surely By \'Alvaro Romaniega
  14. Limited Liability and the Demand for Coinsurance by Individuals and Corporations By Andrea Bergesio; Pablo Koch-Medina; Cosimo Munari
  15. Preferences over Time and under Uncertainty: Theoretical Foundations By Ali al-Nowaihi; Sanjit Dhami
  16. Strategic inattention and divisionalization in duopoly By Promit Kanti Chaudhuri

  1. By: Volker Nocke; Patrick Rey
    Abstract: We study a model in which a monopoly seller decides which among a set of heterogeneous products to offer, and what prices to charge, and consumers engage in costly (random) sequential search to learn prices and valuations. We show that the equilibrium exhibits choice overload: The larger the product line, the fewer consumers start searching. We provide conditions under which the equilibrium size of the product line is socially excessive (or insufficient). We also characterize equilibria when the seller can position products, thereby allowing the possibility of directed search, and disclose product identity. We show that the best equilibrium for the seller may involve randomizing over product positioning and inducing inefficient search. Finally, we extend our analysis to that of a platform choosing which sellers to host.
    Keywords: sequential consumer search, product variety, choice overload, multiproduct firm, platform
    JEL: L12 L15 D42
    Date: 2021–08
  2. By: Sarah Auster; Nicola Pavoni
    Abstract: We study the delegation problem between a principal and an agent, who not only has better information about the performance of the available actions but also superior awareness of the set of actions that are actually feasible. We provide conditions under which the agent finds it optimal to leave the principal unaware of relevant options. By doing so, the agent increases the principal's cost of distorting the agent's choices and increases the principal's willingness to grant him higher information rents. We further show that the principal may use the option of renegotiation as a tool to implement actions that are not describable to her at the contracting stage. If the agent renegotiates, his proposal signals information about the payoff state. We demonstrate that limited awareness of actions improves communication in such games: the principal makes a coarser inference from the recommendations of the privately informed agent and accepts a larger number of his proposals.
    Keywords: Unawareness, optimal delegation, strategic disclosure
    JEL: D82 D83 D86
    Date: 2021–07
  3. By: Heller, Yuval; Kuzmics, Christoph
    Abstract: An equilibrium is communication-proof if it is unaffected by new opportunities to communicate and renegotiate. We characterize the set of equilibria of coordination games with pre-play communication in which players have private preferences over the feasible coordinated outcomes. Communication-proof equilibria provide a narrow selection from the large set of qualitatively diverse Bayesian Nash equilibria in such games. Under a communication-proof equilibrium, players never miscoordinate, play their jointly preferred outcome whenever there is one, and communicate only the ordinal part of their preferences. Moreover, such equilibria are robust to changes in players' beliefs, interim Pareto efficient, and evolutionarily stable.
    Keywords: cheaptalk, communication-proofness, renegotiation-proofness, secrethandshake, incomplete information, evolutionary robustness
    JEL: C72 C73 D82
    Date: 2020–09–14
  4. 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: C72 D44 D82
    Date: 2021–07–29
  5. By: Sumit Shrivastav (Indira Gandhi Institute of Development Research)
    Abstract: In this paper, we analyze the competitive and welfare effects of imperfect consumer recognition, in a duopoly model with switching costs. We demonstrate that the impact of consumer recognition on firms' pricing strategies, industry profits, and welfare crucially depends on the accuracy of consumer recognition. When the extent of correct recognition is greater than that of incorrect recognition equilibrium profits decrease with correct recognition and increase with incorrect recognition Consumer surplus increases with correct recognition and falls with incorrect recognition. Welfare decreases with correct recognition, while impact of incorrect recognition on welfare is non-monotonic On the other hand, when the extent of correct recognition is less than that of incorrect recognition, the reverse happens with equilibrium profits. The effect of correct recognition on consumer surplus is ambiguous, and it increases with incorrect recognition. Welfare increases with correct recognition and may increase or decrease with incorrect recognition.
    Keywords: BBPD, Consumer recognition, Price discrimination, Imperfect information
    JEL: D43 D80 L13 L40
    Date: 2021–06
  6. By: Tom Phelan; Alexis Toda
    Abstract: We analyze equilibrium behavior and optimal policy within a Susceptible-Infected-Recovered epidemic model augmented with potentially undiagnosed agents who infer their health status and a social planner with imperfect enforcement of social distancing. We define and prove the existence of a perfect Bayesian Markov competitive equilibrium and contrast it with the efficient allocation subject to the same informational constraints. We identify two externalities, static (individual actions affect current risk of infection) and dynamic (individual actions affect future disease prevalence), and study how they are affected by limitations on testing and enforcement. We prove that a planner with imperfect enforcement will always wish to curtail activity, but that its incentives vanish as testing becomes perfect. When a vaccine arrives far into the future, the planner with perfect enforcement may encourage activity before herd immunity. We find that lockdown policies have modest welfare gains, whereas quarantine policies are effective even with imperfect testing.
    Keywords: efficiency; externalities; lockdown; perfect Bayesian equilibrium; quarantine
    JEL: C73 D50 D62 I12
    Date: 2021–08–04
  7. By: Anna D'Annunzio; Antonio Russo
    Abstract: A large share of the ads displayed by digital publishers (e.g., newspapers and blogs) are sold via intermediaries (e.g., Google), that have large market power and reportedly allocate the ads in an opaque way. We study the incentives of an intermediary to disclose consumer information to advertisers when auctioning ad impressions. We show that disclosing information that enables advertisers to optimize the allocation of ads on multi-homing consumers is profitable to the intermediary only if advertising markets are sufficiently thick. In turn, we study how disclosure affects the incentives of publishers to outsource the sale of their ads to an intermediary, and relate these incentives to the extent of consumer multi-homing, the competitiveness of advertising markets and the ability of platforms to profile consumers. We show that, even when most consumers multi-home, the publishers may be worse off by outsourcing to the intermediary, in particular if they operate in thin advertising markets. Finally, we study how the intermediary responds to policies designed to enhance transparency or consumer privacy, and the implications of these policies for the online advertising market.
    Keywords: online advertising, intermediary, multi-homing, privacy, transparency
    JEL: D43 D62 L82 M37
    Date: 2021
  8. By: Sumit Shrivastav (Indira Gandhi Institute of Development Research)
    Abstract: In this paper, we analyze the profitability of price discrimination based on recognition of consumers' brand preferences, in a duopoly model with switching costs. We show that, in contrast to existing studies, price discrimination results into higher profits than uniform pricing if consumers are heterogeneous in terms of brand preferences and the extent of such heterogeneity is sufficiently high.
    Keywords: BBPD, Consumer recognition, Price discrimination
    JEL: D43 L13
    Date: 2021–07
  9. By: Wesley H. Holliday; Mikayla Kelley
    Abstract: There is an extensive literature in social choice theory studying the consequences of weakening the assumptions of Arrow's Impossibility Theorem. Much of this literature suggests that there is no escape from Arrow-style impossibility theorems unless one drastically violates the Independence of Irrelevant Alternatives (IIA). In this paper, we present a more positive outlook. We propose a model of comparing candidates in elections, which we call the Advantage-Standard (AS) model. The requirement that a collective choice rule (CCR) be rationalizable by the AS model is in the spirit of but weaker than IIA; yet it is stronger than what is known in the literature as weak IIA (two profiles alike on x, y cannot have opposite strict social preferences on x and y). In addition to motivating violations of IIA, the AS model makes intelligible violations of another Arrovian assumption: the negative transitivity of the strict social preference relation P. While previous literature shows that only weakening IIA to weak IIA or only weakening negative transitivity of P to acyclicity still leads to impossibility theorems, we show that jointly weakening IIA to AS rationalizability and weakening negative transitivity of P leads to no such impossibility theorems. Indeed, we show that several appealing CCRs are AS rationalizable, including even transitive CCRs.
    Date: 2021–08
  10. By: Andrey Malenko; Nadya Malenko; Chester S. Spatt
    Abstract: The quality of proxy advisors' voting recommendations is important for policymakers and industry participants. We analyze the design of recommendations (available to all market participants) and research reports (available only to subscribers) by a proxy advisor, whose objective is to maximize its profits from selling information to shareholders. We show that even if all shareholders’ interests are aligned and aim at maximizing firm value, the proxy advisor benefits from biasing its recommendations against the a priori more likely alternative. Such recommendations “create controversy” about the vote, increasing the probability that the outcome is close and raising each shareholder's willingness to pay for advice. In contrast, it serves the interest of the proxy advisor to make private research reports unbiased and precise. Our results help reinterpret empirical patterns of shareholders’ voting behavior.
    JEL: D72 D82 D83 G34 K22
    Date: 2021–07
  11. By: Claire Chambolle (ALISS - Alimentation et sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Hugo Molina (ALISS - Alimentation et sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: We develop a unified theory of exclusive dealing and exclusionary bundling. In a framework with two competing manufacturers which supply their product(s) through a monopolist retailer, we show that buyer power restores the profitability of such practices involving inefficient exclusion. The mechanism underlying this exclusion is that the compensation required by the retailer to renounce selling the rival product erodes with its buyer power. Among others, we further show that our theory holds when the buyer power differs across manufacturers or when the retailer can strategically narrow (or expand) its product assortment.
    Keywords: Vertical relations,Buyer power,Exclusive dealing,Exclusionary Bundling,Nash-in-Nash bargaining with Threat of Replacement
    Date: 2021–05–21
  12. By: Michelacakis, Nickolas
    Abstract: We consider a mixed ownership duopoly delegation model with spatial price discrimination and constant, albeit different, marginal production costs. In contrast to what holds true for a private duopoly, the Nash equilibrium, absent delegation, for a mixed duopoly with discriminatory pricing according to location is both consistent and socially optimal. We find that under Nash conjectures, in most cases, firm owners have a strong incentive to delegate location decisions to managers. In such cases, firms locate closer to each other. The intensity of the competition leads to lower prices, lower profits, for both firms, and increased surplus for the consumer.
    Keywords: mixed duopoly; delegation; spatial competition; consistent conjectures; Nash equilibrium
    JEL: D43 L13 L21 L22 R32
    Date: 2021–08
  13. By: \'Alvaro Romaniega
    Abstract: Condorcet Jury Theorem or Miracle of Aggregation are frequently invoked to ensure the competence of some aggregate decision-making processes. In this article we explore an estimation of the prior probability of the thesis predicted by the theorem (if there are enough voters, majority rule is a competent decision procedure). We use tools from measure theory to conclude that, prima facie, it will fail almost surely. To update this prior either more evidence in favor of competence would be needed or a modification of the decision rule. Following the latter, we investigate how to obtain an almost sure competent information aggregation mechanism for almost any evidence on voter competence (including the less favorable ones). To do so, we substitute simple majority rule by weighted majority rule based on some weights correlated with epistemic rationality such that every voter is guaranteed a minimal weight equal to one.
    Date: 2021–08
  14. By: Andrea Bergesio (University of Zurich - Department of Banking and Finance; Swiss Finance Institute); Pablo Koch-Medina (University of Zurich - Department of Banking and Finance; Swiss Finance Institute); Cosimo Munari (University of Zurich - Department of Banking and Finance; Swiss Finance Institute)
    Abstract: Within the context of expected utility and in a discrete loss setting, we provide a complete account of the demand for insurance by strictly-risk averse agents and risk-neutral firms when they enjoy limited liability. When exposed to a bankrupting, binary loss and under actuarially fair prices, individuals and firms will either fully insure or not insure at all. The decision to insure will depend on whether the benefits the insuree derives from insurance after having compensated the damaged party are sufficiently attractive to justify the premium paid. When the loss is nonbinary, even when prices are actuarially fair, any amount of coinsurance can be optimal depending on the nature of the loss.
    Keywords: insurance, risk-averse agent, risk-neutral firm, franchise value, limited liability
    JEL: D21 D81 G22 G32 G33
    Date: 2021–05
  15. By: Ali al-Nowaihi; Sanjit Dhami
    Abstract: We formulate a general theory of preferences over outcome-time-probability triplets and decompose uncertainty into risk and hazard. We define the delay, defer, shift and certainty functions that can be uniquely elicited from behaviour. These individually determine stationarity, the common difference effect and its converse; constant, decreasing and increasing impatience; additivity, subadditivity and super additivity; probability independence, the certainty effect and its converse. We propose a general discounted utility model which encompasses the main empirically supported discounted utility models. We show that our axioms on preferences are satisfied in our general discounted utility model. Finally, we discuss the various explanations of the common difference effect.
    Keywords: time preferences, preferences under uncertainty, discounted utility models, common difference effect, impatience, additivity, certainty effect, probability weighting function, survival function
    JEL: D15 D91 D81
    Date: 2021
  16. By: Promit Kanti Chaudhuri (Indira Gandhi Institute of Development Research)
    Abstract: In this paper, a differentiated product economy is modeled where firms strategically set up autonomous rival divisions and the divisions play the quantity competition game `a la Cournot or by means of monopolistic competition, where the divisions are unaware of the impact of their output either on the firm's total output or on the total industry output. This case of divisions being unaware of the impact of their outputs on the firm's aggregate output or on the industry total output is termed as `Strategic Inattention'. The incentive to divisionalize still remains within the firms even in the case of the `Strategic Inattention', but the incentive is lower than the case of normal Cournot competition. Next in a duopoly, the firms play a three stage game. In the first stage, the firms decide whether to let their divisions utilize or ignore the information on the impact of their individual output on the firm's total output or industry total output. In the second stage the firms strategically decide on the number of divisions and in the final stage the divisions compete against each other in terms of quantity. It is seen that one firm deciding to be inattentive to the information available and the other firm using that information, is the equilibrium outcome. Thus inattentive and attentive firms coexist in a Subgam Perfect Nash Equilibrium. This result is in sharp contrast to the findings of Cellini et al. (2020).
    Keywords: Divisionalization, information, Monopolistic competition, Oligopoly, Strategic interaction
    JEL: D43 L11 L13
    Date: 2021–07

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