nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒10‒25
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Persuasion by Dimension Reduction By Semyon Malamud; Anna Cieslak; Andreas Schrimpf
  2. Dynamic Monopoly and Consumers Profiling Accuracy By Didier Laussel; Ngo Van Long; Joana Resende
  3. Auction design with ambiguity: Optimality of the first-price and all-pay auctions By Sosung Baik; Sung-Ha Hwang
  4. Coalition Formation in Games with Externalities By Maria Montero
  5. Minimax regret with imperfect ex-post knowledge of the state By Giacomo Bonanno
  6. How Do the Relative Superiority of a High-quality Good and Cost Inefficiency between Firms Affect Product Lines in Multiproduct Firms? By Tetsuya Shinkai; Ryoma Kitamura
  7. Bayesian Persuasion in Sequential Trials By Shih-Tang Su; Vijay G. Subramanian; Grant Schoenebeck
  8. Getting auctions for transportation capacity to roll By Cherbonnier, Frédéric; Salant, David; Van Der Straeten, Karine
  9. Round-Robin Political Tournaments: Abstention, Truthful Equilibria, and Effective Power By Roland Pongou; Bertrand Tchantcho
  10. Group network effects in price competition By Renato Soeiro; Alberto Pinto
  11. Platform Liability and Innovation By Doh-Shin Jeon; Yassine Lefouili; Leonardo Madio
  12. Online Segregation By John Lynham; Philip R Neary
  13. Biographical By Nordhaus, William
  14. Biographical By Milgrom, Paul
  15. Biographical By Wilson, Robert

  1. By: Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Anna Cieslak (Duke University - Fuqua School of Business; CEPR; National Bureau of Economic Research (NBER)); Andreas Schrimpf (Bank for International Settlements (BIS) - Monetary and Economic Department; CREATES - Aarhus University)
    Abstract: How should an agent (the sender) observing multi-dimensional data (the state vector) persuade another agent (the receiver) to take the desired action? We show that it is always optimal for the sender to perform a (non-linear) dimension reduction by projecting the state onto a lower dimensional object that we call the "optimal information manifold". We characterize geometric properties of this manifold and link them to the sender's preferences. Optimal policy splits information into "good" and "bad" components. When the sender's marginal utility is linear, it is always optimal to reveal the full magnitude of good information. In contrast, with concave marginal utility, optimal information design conceals the extreme realizations of good information and only reveals its direction (sign). We illustrate these effects by explicitly solving several multi-dimensional Bayesian persuasion problems.
    Keywords: Bayesian Persuasion, Information Design, Signalling
    JEL: D82 D83 E52 E58 E61
    Date: 2021–10
  2. By: Didier Laussel; Ngo Van Long; Joana Resende
    Abstract: Using a Markov-perfect equilibrium model, we show that the use of customer data to practice intertemporal price discrimination will improve monopoly profit if and only if information precision is higher than a certain threshold level. This U-shaped relationship lends support to a popular view that knowledge is good only if it is sufficiently refined. When information accuracy can only be achieved through costly investment, we find that investing in profiling is profitable only if this allows to reach a high enough level of information precision. Consumers expected surplus being a hump-shaped function of information accuracy, we show that consumers have an incentive to lobby for privacy protection legislation which raises the cost of monopoly’s investment in information accuracy. However, this cost should not dissuade firms to collect some information on customers’ tastes, as the absence of consumers’ profiling is actually detrimental to consumers.
    Keywords: consumers profiling, endogenous investment in profiling capability, dynamic monopoly, consumers‘ collective action on privacy protection legislation
    JEL: C73 D42 L12 L15
    Date: 2021
  3. By: Sosung Baik; Sung-Ha Hwang
    Abstract: We study the optimal auction design problem when bidders' preferences follow the maxmin expected utility model. We suppose that each bidder's set of priors consists of beliefs close to the seller's belief, where "closeness" is defined by a divergence. For a given allocation rule, we identify a class of optimal transfer candidates, named the win-lose dependent transfers, with the following property: each type of bidder's transfer conditional on winning or losing is independent of the competitor's type report. Our result reduces the infinite-dimensional optimal transfer problem to a two-dimensional optimization problem. By solving the reduced problem, we find that: (i) among efficient mechanisms with no premiums for losers, the first-price auction is optimal; and, (ii) among efficient winner-favored mechanisms where each bidder pays smaller amounts when she wins than loses: the all-pay auction is optimal. Under a simplifying assumption, these two auctions remain optimal under the endogenous allocation rule.
    Date: 2021–10
  4. By: Maria Montero (University of Nottingham)
    Abstract: This paper studies an extensive form game of coalition formation with random proposers in games with externalities. It is shown that an agreement will be reached without delay if any set of coalitions profits from merging. Even under this strong condition, the equilibrium coalition structure is not necessarily efficient. There may be multiple equilibria even in the absence of externalities, and symmetric players are not necessarily treated symmetrically in equilibrium. If the grand coalition forms without delay in equilibrium, expected payoffs must be in the core of the characteristic function game that assigns to each coalition its equilibrium payoff. Compared with the rule of order process of Ray and Vohra (1999), the bargaining procedure with random proposers tends to give a large advantage to the proposer, whereas the bargaining procedure with a rule of order tends to favor the responders. The equilibria of the two procedures cannot be ranked in general in terms of efficiency.
    Keywords: coalition formation, externalities, partition function, random proposers, core, multiple equilibria
    Date: 2021–05
  5. By: Giacomo Bonanno (Department of Economics, University of California Davis)
    Abstract: We consider decision problems under complete ignorance and extend the minimax regret principle to situations where, after taking an action, the decision maker does not necessarily learn the state of the world. For example, if the decision maker only learns what the outcome is, then all she knows is that the actual state is one of the possibly several states that yield the observed outcome under the chosen action. We refer to this situation as imperfect ex-post information. We also extend the framework to encompass the possibility of less than the extreme pessimism that characterizes the minimax regret criterion.
    Keywords: Regret, minimax, pessimism, Hurwicz index
    JEL: C0 D0
    Date: 2021–10–19
  6. By: Tetsuya Shinkai (School of Economics, Kwansei Gakuin University); Ryoma Kitamura (Faculty of Economics, Otemon Gakuin University)
    Abstract: We consider the product line strategies of duopolistic firms, each of which can supply two vertically differentiated products under nonnegative output constraints and expectations of their rival's product line reaction. Considering a game of firms with heterogeneous (homogeneous) unit costs for high- (low-) quality products, we derive the equilibria of the game and explore the effects of the relative superiority of the high-quality product and relative cost efficiency on the equilibrium outcomes and illustrate the result using the production substitution of differentiated goods within a firm and the high-quality good between firms.
    Keywords: Multiproduct firm; Product line; Vertical product differentiation
    JEL: D21 D43 L13 L15
    Date: 2021–10
  7. By: Shih-Tang Su; Vijay G. Subramanian; Grant Schoenebeck
    Abstract: We consider a Bayesian persuasion or information design problem where the sender tries to persuade the receiver to take a particular action via a sequence of signals. This we model by considering multi-phase trials with different experiments conducted based on the outcomes of prior experiments. In contrast to most of the literature, we consider the problem with constraints on signals imposed on the sender. This we achieve by fixing some of the experiments in an exogenous manner; these are called determined experiments. This modeling helps us understand real-world situations where this occurs: e.g., multi-phase drug trials where the FDA determines some of the experiments, funding of a startup by a venture capital firm, start-up acquisition by big firms where late-stage assessments are determined by the potential acquirer, multi-round job interviews where the candidates signal initially by presenting their qualifications but the rest of the screening procedures are determined by the interviewer. The non-determined experiments (signals) in the multi-phase trial are to be chosen by the sender in order to persuade the receiver best. With a binary state of the world, we start by deriving the optimal signaling policy in the only non-trivial configuration of a two-phase trial with binary-outcome experiments. We then generalize to multi-phase trials with binary-outcome experiments where the determined experiments can be placed at any chosen node in the trial tree. Here we present a dynamic programming algorithm to derive the optimal signaling policy that uses the two-phase trial solution's structural insights. We also contrast the optimal signaling policy structure with classical Bayesian persuasion strategies to highlight the impact of the signaling constraints on the sender.
    Date: 2021–10
  8. By: Cherbonnier, Frédéric; Salant, David; Van Der Straeten, Karine
    Abstract: An auction of transport capacity can only roll forward if competitive bidders show up at the start. To characterize bidding behavior, we develop a model with a single incumbent potentially in competition with a single challenger; should the challenger obtain slots, the two firms will engage post-auction in capacity con-strained price competition. We show how the auction structure, that is, whether the slots are auctioned one at a time, and if not, how they are packaged affects the outcome. Our key finding is that the division of the available slots into tranches can significantly affect the outcome of the auction. Absent any set-asides, a single auc-tion for all the slots will almost certainly be won by an incumbent. Set-asides can enable the challenger to win one or more packages of slots. Further, when the slots are split up, and auctioned one-at-a-time or in batches, a challenger’s prospects improve significantly, and no longer rely only on set-asides. The implications of our analysis are (a) the outcome will depend crucially on auction design decisions,(b) set-asides for challengers can help and (c) an auction that results in successful entry by challengers may result in reduced auction revenues and industry profits.
    Keywords: Rail transportation; Open access; Auctions; Regulation
    JEL: D40 L12 L13 L40 L92
    Date: 2021–10–18
  9. By: Roland Pongou (Department of Economics, University of Ottawa, Ottawa, ON); Bertrand Tchantcho (Department of Mathematics, École Normale Supérieure, University of Yaoundé I, Cameroon; Université de Cergy Pontoise)
    Abstract: A round-robin political tournament is an election format where multiple candidates contest in pairs, and votes are aggregated using a general rule to form a social ranking. We formalize this tournament as a strategic form game and provide a necessary and sufficient condition under which truthful voting is a Nash equilibrium. Building on this analysis, we study the concept of effective power, defined as a voter's ability to bring about a social ranking that maximizes his preferences. We show that the classical theories of political power do not translate into effective power in general. We then provide a full characterization of the classes of political tournaments and utility metrics for which these theories capture effective power. We offer both structural and behavioral interpretations of the findings, and derive practical implications for the design of political tournaments that are compatible with truth-telling.
    Keywords: Round-robin Political Tournaments; Ranked Voting; Hyper-preferences; Truthful Equilibria; Effective Power; Psychology; Political Design.
    Date: 2021
  10. By: Renato Soeiro; Alberto Pinto
    Abstract: The partition of society into groups, polarization, and social networks are part of most conversations today. How do they influence price competition? We discuss Bertrand duopoly equilibria with demand subject to network effects. Contrary to models where network effects depend on one aggregate variable (demand for each choice), partitioning the dependence into groups creates a wealth of pure price equilibria with profit for both price setters, even if positive network effects are the dominant element of the game. If there is some asymmetry in how groups interact, two groups are sufficient. If network effects are based on undirected and unweighted graphs, at least five groups are required but, without other differentiation, outcomes are symmetric.
    Date: 2021–10
  11. By: Doh-Shin Jeon (Toulouse School of Economics, University of Toulouse Capitole, 1, Esplanade de l’Université, 31080 Toulouse, Cedex 06, France); Yassine Lefouili (Toulouse School of Economics, University of Toulouse Capitole, 1, Esplanade de l’Université, 31080 Toulouse, Cedex 06, France); Leonardo Madio (University of Padova, Department of Economics and Management, Via del Santo, 33, 35139 Padova, Italy)
    Abstract: We study an e-commerce platform's incentives to delist IP-infringing products and the effects of introducing a liability regime that induces the platform to increase its screening intensity. We identify conditions under which platform liability is socially desirable (respectively, undesirable) by analyzing its intended and unintended effects on the innovation incentives of brand owners. We show that making the platform liable for the presence of IP-infringing products can lead to a reduction (instead of an increase) in brand owners' innovation if the platform responds to more screening by raising its commission rate. We then consider various extensions that allow us to identify additional forces that strengthen (respectively, weaken) the social desirability of liability. We conclude by presenting some implications for policymakers.
    Keywords: Platforms, Platform Liability, Intellectual Property, Innovation, Delisting
    JEL: L13 L43 L96
    Date: 2021–09
  12. By: John Lynham; Philip R Neary
    Abstract: A large number of agents from two groups prefer to interact with their own types online and also have preferences over two online platforms. We find that an online platform can be tipped from integrated to segregated without any change in the ratio of the two groups interacting on the platform. Instead, segregation can be triggered by changes in the absolute numbers of both groups, holding the Schelling ratio fixed. In extreme cases, the flight of one group from a platform can be triggered by a change in the group ratio in favor of the group that ends up leaving.
    Date: 2021–10
  13. By: Nordhaus, William (Yale University)
    Abstract: I first saw light in Albuquerque, New Mexico, USA, at the dawn of World War II. My earliest memories are of the warm climate, skiing in winter, trout fishing in summer, and a fragrant alfalfa field outside my window.
    Keywords: long-term growth; climate change;
    JEL: O00
    Date: 2021–10–10
  14. By: Milgrom, Paul (Stanford University)
    Abstract: I was born in Detroit, Michigan to Abraham Isaac Milgrom and Anne Lillian Milgrom nee Finkelstein. Abraham Milgrom was born in Canada to Polish-Jewish immigrants, and Anne Finkelstein in Detroit, Michigan, to Ukrainian-Jewish immigrants. I am the second of the Milgroms’ four sons; Stuart is my older brother and Barry and Steven my younger twin brothers. We grew up in Oak Park – a suburb of Detroit – where I attended the John Dewey School followed by Oak Park High School, from which I graduated in 1966.
    Keywords: Auctions
    JEL: D44
    Date: 2021–10–11
  15. By: Wilson, Robert (Stanford Univeristy)
    Abstract: After rocky early years, I had a happy youth in a small town, and then stumbled through eight years at Harvard, emerging with little sense of what to do next, until I moved to Stanford where my research thrived. A minor project on adverse selection in auctions led me to join in the nascent reconstruction of economic theory using game-theoretic models, and then later, foundational topics in game theory, all focused on the role of agents’ information and their effect on incentives. I’ve enjoyed working with PhD students and been fortunate to have superb co-authors with better skills.
    Keywords: Auctions
    JEL: D44
    Date: 2021–10–11

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