nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒09‒13
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Optimal Trade Mechanisms with Adverse Selection and Inferential Mistakes By Takeshi Murooka; Takuro Yamashita
  2. Designing a Competitive Monotone Signaling Equilibrium By Seungjin Han; Alex Sam; Youngki Shin
  3. Efficient Bilateral Trade via Two-Stage Mechanisms under One- Sided Asymmetric Information By Kunimoto, Takashi; Zhang, Cuiling
  4. Cycling and Categorical Learning in Decentralized Adverse Selection Economies By Jehiel, Philippe; Mohlin, Erik
  5. Rational Inattention via Ignorance Equivalence By Roc Armenter; Michèle Müller-Itten; Zachary Strangebye
  6. Winning coalitions in plurality voting democracies By René van den Brink; Dinko Dimitrov; Agnieszka Rusinowska
  7. Profit Effects of Consumers’ Identity Management: A Dynamic Model By Didier Laussel; Ngo Van Long; Joana Resende
  8. Who Cares More? Allocation with Diverse Preference Intensities By Pietro Ortoleva; Evgenii Safonov; Leeat Yariv
  9. Costly Multidimensional Screening By Frank Yang
  10. Multi-agent Bayesian Learning with Best Response Dynamics: Convergence and Stability By Manxi Wu; Saurabh Amin; Asuman Ozdaglar
  11. Fuzzy Conventions By Marcin P\k{e}ski
  12. The Value of Interlocking Directorates in Vertical Contracting By Maria Rosa Battaggion; Vittoria Cerasi; Gulen Karakoc
  13. Unidirectional substitutes and complements By Chao Huang
  14. Learning and Acyclicity in the Market Game By Artur Dolgopolov; Cesar Martinelli
  15. How should durable goods firms combine online and mass media advertisements to promote sales? By Fujisawa, Chieko; Kasuga, Norihiro
  16. It takes two to tango: Interlockings and Partial Equity Ownership By Maria Rosa Battaggion; Vittoria Cerasi
  17. Deliberative Democracy with Costly Voting Power Portfolios By Dimitrios Karoukis
  18. Cournot-Bertrand equilibria under two-part tariff contract By Basak, Debasmita
  19. Direct network externalities and dynamics of two-sided platforms By Aslan, Fatma; Haouel, Chourouk; Nemeslaki, Andras; Somogyi, Robert
  20. Quality Differentiation and Optimal Pricing Strategy in Multi-Sided Markets By Soo Jin Kim; Pallavi Pal
  21. Free entry under an output-cap constraint By Hiroaki Ino; Toshihiro Matsumura

  1. By: Takeshi Murooka (Osaka School of International Public Policy (OSIPP), Osaka University); Takuro Yamashita (Toulouse School of Economics, University of Toulouse)
    Abstract: We study an adverse selection environment, where a rational seller can trade a good of which she privately knows its value to a buyer, and there are gains from trade. The buyer's types differ in their degree of inferential abilities: A rational type correctly infers the value of the good from the seller's offer, whereas a naive type under-appreciates the correlation between the seller's private information and offer. We characterize the optimal menu mechanism that maximizes the social surplus. Notably, no matter how severe the adverse selection is (in particular, even when no trade is the unique possible outcome if all agents are rational), all types of buyers trade in the optimal mechanism. The rational buyer's trade occurs at the expense of the naive buyer's losses. We also investigate a consumer-protection policy of limiting the losses and discuss its implications.
    Keywords: adverse selection, inferential naivety, mechanism design, behavioral contract theory, consumer protection
    JEL: D82 D86 D90 D91
    Date: 2021–09
  2. By: Seungjin Han; Alex Sam; Youngki Shin
    Abstract: A decision maker (DM) determines a set of reactions that receivers can choose before senders and receivers move in a generalized competitive signaling model with two-sided matching. The DM’s optimal design of the unique stronger monotone signaling equilibrium (unique D1 equilibrium) is equivalent to the choice problem of two threshold sender types, one for market entry and the other for pooling on the top. Our analysis sheds light on the impacts of a trade-off between matching efficiency and signaling costs, the relative heterogeneity of receiver types to sender types, and the productivity of the sender’s action on optimal equilibrium designing.
    Keywords: optimal equilibrium design; monotone signaling equilibrium; stronger monotone belief; Criterion D1
    JEL: D82 D86
    Date: 2021–09
  3. By: Kunimoto, Takashi (School of Economics, Singapore Management University); Zhang, Cuiling (The Institute for Advanced Economic Research, Dongbei University of Finance and Eco- nomics)
    Abstract: This paper considers a bilateral-trade model with one-sided asymmetric information in which one agent (seller) initially owns an indivisible object and is fully informed of its value, while the other agent (buyer) intends to obtain the object whose value is unknown to himself. As Jehiel and Pauzner (2006) show that no mechanisms can generally result in efficient, voluntary bilateral trades, we aim to overturn this impossibility result by employing two-stage mechanisms (Mezzetti (2004)) in which first, the outcome (e.g., allocation of the goods) is determined, then the agents observe their own outcome-decision payoffs, and finally, transfers are made. We show that the generalized two-stage Groves mechanism induces efficient, voluntary bilateral trades. On the contrary, we also show by means of an example that the generalized two-stage Groves mechanism fails to achieve efficient, voluntary trades in a two-sided asymmetric information setup in which both parties have private information and each party’s valuation depends on the other’s information in the same way.
    Keywords: bilateral trades; one-sided asymmetric information; two-stage mechanisms
    JEL: C72 D78 D82
    Date: 2021–08–01
  4. By: Jehiel, Philippe (Paris School of Economics); Mohlin, Erik (Department of Economics, Lund University)
    Abstract: We study learning in a decentralized pairwise adverse selection economy, where buyers have access to the quality of traded goods but not to the quality of non- traded goods. Buyers categorize ask prices in order to predict quality as a function of ask price. The categorization is endogenously determined so that outcomes that are observed more often are categorized more finely, and within each category beliefs reflect the empirical average. This leads buyers to have a very fine understanding of the relationship between qualities and ask prices for prices below the current market price, but only a coarse understanding above that price. We find that this induces a price cycle involving the Nash equilibrium price, and one or more higher prices.
    Keywords: Adverse selection; Bounded rationality; Categorization; Learning; Model misspecification; OTC markets
    JEL: C70 C73 D82 D83 D91
    Date: 2021–09–02
  5. By: Roc Armenter; Michèle Müller-Itten; Zachary Strangebye
    Abstract: We introduce the concept of the ignorance equivalent to effectively summarize the payoff possibilities in a finite Rational Inattention problem. The ignorance equivalent is a unique fictitious action that is weakly preferable to all existing learning strategies and yet generates no new profitable learning opportunities when added to the menu of choices. We fully characterize the relationship between the ignorance equivalent and the optimal learning strategies. Agents with heterogeneous priors self-select their own ignorance equivalent, which gives rise to an expected-utility analogue of the Rational Inattention problem. The approach provides new insights for menu expansion, the formation of consideration sets, the value of information, and belief elicitation. In a strategic game of contract choice, the ignorance equivalent emerges naturally in equilibrium.
    Keywords: Rational inattention; information acquisition; learning.
    JEL: D81 D83 C63
    Date: 2021–09–03
  6. By: René van den Brink (VU University Amsterdam); Dinko Dimitrov (Saarland University [Saarbrücken]); Agnieszka Rusinowska (CNRS - Centre National de la Recherche Scientifique, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: We consider plurality voting games being simple games in partition function form such that in every partition there is at least one winning coalition. Such a game is said to be weighted if it is possible to assign weights to the players in such a way that a winning coalition in a partition is always one for which the sum of the weights of its members is maximal over all coalitions in the partition. A plurality game is called decisive if in every partition there is exactly one winning coalition. We show that in general, plurality games need not be weighted, even not when they are decisive. After that, we prove that (i) decisive plurality games with at most four players, (ii) majority games with an arbitrary number of players, and (iii) decisive plurality games that exhibit some kind of symmetry, are weighted. Complete characterizations of the winning coalitions in the corresponding partitions are provided as well.
    Date: 2021–04
  7. By: Didier Laussel; Ngo Van Long; Joana Resende
    Abstract: We consider a non-durable good monopoly that collects data on its customers in order to profile them and subsequently practice price discrimination on returning customers. The monopolist’s price discrimination scheme is leaky, in the sense that an endogenous fraction of consumers choose to incur a privacy cost to become "active", i.e., to be able to conceal their identity when they return in the following periods. We characterize the Markov Perfect Equilibrium of the game. We find that, regardless of the accuracy of firm’s data on their customers, managers adjust their pricing and market expansion strategies to the presence of active customers in the following way: (i) reduce the pace at which introductory price falls over time, and (ii) strategically guarantee that market expansion is incomplete. The equilibrium number of passive customers in the market is found to be increasing in the level of the privacy cost. Investigating the impact of customers’ identity management on profits, we find that the monopolist’s aggregate profit is a U-shaped function of the privacy cost whatever the degree of the monopolist’s information accuracy. Still, the profit effects of consumers’ identity management choices are shown to depend on the monopolist’s profiling capabilities. Two customer profiling structures are compared. In the case of full information acquisition (FIA), the firm can practice personalized pricing on returning passive customers, while in the case of purchase history information (PHI), it has only enough information for group pricing. We show that in the FIA case, the monopoly equilibrium profit is globally an increasing function of the privacy cost while in the PHI case, it is almost always a globally decreasing function of it (especially for low discount factors).
    Date: 2021
  8. By: Pietro Ortoleva; Evgenii Safonov; Leeat Yariv
    Abstract: Goods and services---public housing, medical appointments, schools---are often allocated to individuals who rank them similarly but differ in their preference intensities. We characterize optimal allocation rules when individual preferences are known and when they are not. Several insights emerge. First-best allocations may involve assigning some agents "lotteries" between high- and low-ranked goods. When preference intensities are private information, second-best allocations always involve such lotteries and, crucially, may coincide with first-best allocations. Furthermore, second-best allocations may entail disposal of services. We discuss a market-based alternative and show how it differs.
    JEL: C78 D02 D47
    Date: 2021–09
  9. By: Frank Yang
    Abstract: A screening instrument is costly if it is socially wasteful and productive otherwise. A principal screens an agent with multidimensional private information and quasilinear preferences that are additively separable across two components: a one-dimensional productive component and a multidimensional costly component. Can the principal improve upon simple one-dimensional mechanisms by also using the costly instruments? We show that if the agent has preferences between the two components that are positively correlated in a suitably defined sense, then simply screening the productive component is optimal. The result holds for general type and allocation spaces, and allows for nonlinear and interdependent valuations. We discuss applications to optimal regulation, labor market screening, and monopoly pricing.
    Date: 2021–09
  10. By: Manxi Wu; Saurabh Amin; Asuman Ozdaglar
    Abstract: We study learning dynamics induced by strategic agents who repeatedly play a game with an unknown payoff-relevant parameter. In this dynamics, a belief estimate of the parameter is repeatedly updated given players' strategies and realized payoffs using Bayes's rule. Players adjust their strategies by accounting for best response strategies given the belief. We show that, with probability 1, beliefs and strategies converge to a fixed point, where the belief consistently estimates the payoff distribution for the strategy, and the strategy is an equilibrium corresponding to the belief. However, learning may not always identify the unknown parameter because the belief estimate relies on the game outcomes that are endogenously generated by players' strategies. We obtain sufficient and necessary conditions, under which learning leads to a globally stable fixed point that is a complete information Nash equilibrium. We also provide sufficient conditions that guarantee local stability of fixed point beliefs and strategies.
    Date: 2021–09
  11. By: Marcin P\k{e}ski
    Abstract: We study binary coordination games with random utility played in networks. A typical equilibrium is fuzzy -- it has positive fractions of agents playing each action. The set of average behaviors that may arise in an equilibrium typically depends on the network. The largest set (in the set inclusion sense) is achieved by a network that consists of a large number of copies of a large complete graph. The smallest set (in the set inclusion sense) is achieved on a lattice-type network. It consists of a single outcome that corresponds to a novel version of risk dominance that is appropriate for games with random utility.
    Date: 2021–08
  12. By: Maria Rosa Battaggion; Vittoria Cerasi; Gulen Karakoc
    Abstract: This study analyzes the choice to interlock between two competing companies when their privately known marginal costs are correlated. The two rivals are organized into different business models: one delegates its production to a subcontractor, while the other is vertically integrated and carries its production in-house. By accepting the interlock, the hosting company discloses its marginal cost to the rival. The two companies decide ex-ante whether to commit to interlock. In a Perfect Bayesian Equilibrium, the vertically separated company gains more from interlocking than the rival because it saves on internal agency costs and gains market power, otherwise unbalanced toward the competitor. Interestingly, we show the following: for high cost correlation allowing a unilateral interlock benefits consumers. Hence, our results provide reasons for approving horizontal interlocking in markets where companies have asymmetric business models, and the interlocking company outsources its production.
    Keywords: Interlocking directorates; Agency costs; Vertical hierarchy.
    JEL: D43 D82 D83 L2
    Date: 2021–09
  13. By: Chao Huang
    Abstract: In discrete matching markets, substitutes and complements can be unidirectional between two groups of workers when members of one group are more important or competent than those of the other group for firms. We show that a stable matching exists and can be found by a two-stage Deferred Acceptance mechanism when firms' preferences satisfy a unidirectional substitutes and complements condition. This result applies to both firm-worker matching and controlled school choice. Under the framework of matching with continuous monetary transfers and quasi-linear utilities, we show that substitutes and complements are bidirectional for a pair of workers.
    Date: 2021–08
  14. By: Artur Dolgopolov (Department of Economics, European University Institute); Cesar Martinelli (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University)
    Abstract: We show that strategic market games, the non-cooperative implementation of a matching with transfers or an assignment game, are weakly acyclic. This property ensures that many common learning algorithms will converge to Nash equilibria in these games, and that the allocation mechanism can therefore be de- centralized. Convergence hinges on the appropriate price clearing rule and has di erent properties for better- and best-response dynamics. We tightly characterize the robustness of this convergence in terms of so-called schedulers for both types of dynamics.
    Date: 2021–09
  15. By: Fujisawa, Chieko; Kasuga, Norihiro
    Abstract: We develop an advertising strategy for durable goods firms applying a dual time-period model while considering three-stage game in a Cournot competition. We assume that firms employ two advertising approaches; one is online advertising, which escalates consumers' willingness to purchase goods and the other is conventional mass media advertising, including television and radio, which presents a limited 'evoked set' of goods. The term evoked set implies that consumers only consider a small group of brands prior to making a purchase. As firms understand the character of each advertisement, sales strategy is devised to target a heterogeneous consumer through advertising. Should firms only choose one type of advertisement or a combination of the two kinds of ads available? In this model we assume that firms directly consider both types of advertising. Our analysis demonstrates that online advertisement raises the total number of consumer-product matches in the competitive equilibrium. We also show that firms combine the two types of advertisement to apply the differing effects of each format. Moreover, firms increase revenue through an appropriate mix of advertising strategy, although the cost of advertising might increase. Regarding the future direction of advertising, we anticipate that the combination of both online and conventional strategies will persist, maintaining the growth of a diverse product market.
    Keywords: Durable goods,Online media advertising,mass media advertising,targeting,media strategy
    JEL: D15 D43 L13 D82
    Date: 2021
  16. By: Maria Rosa Battaggion; Vittoria Cerasi
    Abstract: We study the relation between the acquisition of a partial equity ownership and interlocking directorates among rival companies. Partial equity ownership between rivals in the product market is convenient, even in the case of passive participation, since, by internalizing competition, it raises the profits of both companies. The price of the acquisition, however, is affected by the marginal cost of the target company. When this cost is private information, the bidder has to elicit the true value of the equity stake from the target through a proper design of the offer in the context of asymmetric information. One possible alternative is for the bidder to propose an interlocking directorate to observe the private cost: to achieve this goal, the bidder has to convince the target to host one of his executives on the board. We build a novel framework to analyze the choice to interlock together with the acquisition of a minority equity stake and study when the two events are observed at the equilibrium. We suggest that interlocking directorates may be ancillary to a minority acquisition when the value of the target is private information.
    Keywords: Interlocking Directorates; Partial Equity Ownership; Information; Oligopoly.
    JEL: D4 G3 L2
    Date: 2021–07
  17. By: Dimitrios Karoukis
    Abstract: We present a collective decision-making model where one or more individuals propose a status quo change that is iteratively updated by a dynamic committee of experts until a point when a referendum is held to decide its finality. Suppose that everyone in the society has some initial voting power. In each iteration there are three stages. In the first stage, each individual decides what percentage of their voting power they want to keep for themselves and how to distribute the rest of it to other individuals in the society. With every change in distribution there is a voting power penalty. In the second stage, the deliberative committee consists of the most powerful individuals, whose role is to bring forward corrections to the proposal. In the third stage, if an individual outside of the committee has kept some voting power for herself and disagrees with a correction, she can vote against it. If more than half of the voting power outside the committee is against a correction then it is discarded. If the committee or the proposal remain unchanged for two consecutive time periods, the deliberation stops and a referendum is held. The sum of the voting power penalties from past redistributions is added to the final negative vote, while the voting power of those who abstain is counted as positive. We show that this process will stop in finite time.
    Date: 2021–09
  18. By: Basak, Debasmita
    Abstract: We consider a vertically related market where one quantity setting and another price setting downstream firm negotiate the terms of a two-part tariff contract with an upstream input supplier. In contrast to the traditional belief, we show that when bargaining is decentralised, the price setting firm produces a higher output and earns a higher profit than the quantity setting firm. And, when bargaining is centralised, both firms produce the same output whereas the profit is higher under the price setting firm than the quantity setting firm.
    Keywords: Bargaining; Bertrand; Cournot; Two-part tariffs; Vertical pricing; Welfare
    JEL: L13 L2 L22
    Date: 2021–09–04
  19. By: Aslan, Fatma; Haouel, Chourouk; Nemeslaki, Andras; Somogyi, Robert
    Abstract: We investigate the effect of direct network externalities on the long- run dynamics of two-sided platforms. Two-sided platforms have been widespread in the economy, acting as intermediaries connecting two dis- tinct groups of agents. A defining characteristic of the two-sidedness is the existence of indirect network externalities between the two sides. How- ever, direct externalities can also be important in one or both sides of the market. For instance, direct externalities include review systems where buyers on the platform benefit from other buyers' ratings and comments. We find that considering direct externalities changes the dynamics quali- tatively. For example, instead of saddle path dynamics, they can lead to unstable node dynamics and the collapse of a platform.
    Date: 2021
  20. By: Soo Jin Kim; Pallavi Pal
    Abstract: This paper analyzes the generalized quality differentiation model in multi-sided markets with positive externalities, which leads to new insights into the optimal pricing structure of the firm. We find that quality differentiation for users on one side affects not only the side involving differentiation but also the other side due to cross-side network externalities, thereby affecting the pricing structure of multi-sided firms. In addition, quality differentiation affects the strategic relationships among all the choice variables for the platform, enabling the platform to strategically use quality differentiation to raise its profits.
    Keywords: multi-sided market, quality differentiation, platform business strategies
    JEL: D43 L11 L42
    Date: 2021
  21. By: Hiroaki Ino (School of Economics, Kwansei Gakuin University); Toshihiro Matsumura (Institute of Social Science, The University of Tokyo)
    Abstract: This study considers a peer-to-peer market with capacity-constrained suppliers. We examine a free-entry market of individual suppliers and discuss the welfare consequences of free entry. We show that the number of entries is socially optimal.
    Keywords: sharing economy, Cournot competition, excess entry theorem, private lodging businesses, capacity constraint
    JEL: D43 L13 K25
    Date: 2021–09

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