nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒11‒01
ten papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. How To Sell (or Procure) in a Sequential Auction By Kenneth Hendricks; Thomas Wiseman
  2. The Absence of Attrition in a War of Attrition under Complete Information By George Georgiadis; Youngsoo Kim; H. Dharma Kwon
  3. Fake Reviews and Naive Consumers By Boris Knapp
  4. Incentive contracts when agents distort probabilities By Víctor González-Jiménez
  5. Partnership Dissolution with Cash-Constrained Agents By Guillaume Pommey
  6. Free Riding in Networks By Markus Kinateder; Luca Paolo Merlino
  7. Private Labels in Marketplaces By Radostina Shopova
  8. Multi-Product Pricing and Minimum Resale Price Maintenance By Dertwinkel-Kalt, Markus; Wey, Christian
  9. On the Behavioral Consequences of Reverse Causality By Ran Spiegler
  10. Learning Frames By Vessela Daskalova; Nicolaas J. Vriend

  1. By: Kenneth Hendricks; Thomas Wiseman
    Abstract: A seller with one unit of a good faces N\geq3 buyers and a single competitor who sells one other identical unit in a second-price auction with a reserve price. Buyers who do not get the seller's good will compete in the competitor's subsequent auction. We characterize the optimal mechanism for the seller in this setting. The first-order approach typically fails, so we develop new techniques. The optimal mechanism features transfers from buyers with the two highest valuations, allocation to the buyer with the second-highest valuation, and a withholding rule that depends on the highest two or three valuations. It can be implemented by a modified third-price auction or a pay-your-bid auction with a rebate. This optimal withholding rule raises significantly more revenue than would a standard reserve price. Our analysis also applies to procurement auctions. Our results have implications for sequential competition in mechanisms.
    Date: 2021–10
  2. By: George Georgiadis; Youngsoo Kim; H. Dharma Kwon
    Abstract: We consider a two-player game of war of attrition under complete information. It is well-known that this class of games admits equilibria in pure, as well as mixed strategies, and much of the literature has focused on the latter. We show that if the players' payoffs whilst in "war" vary stochastically and their exit payoffs are heterogeneous, then the game admits Markov Perfect equilibria in pure strategies only. This is true irrespective of the degree of randomness and heterogeneity, thus highlighting the fragility of mixed-strategy equilibria to a natural perturbation of the canonical model. In contrast, when the players' flow payoffs are deterministic or their exit payoffs are homogeneous, the game admits equilibria in pure and mixed strategies.
    Date: 2021–10
  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: 2021–07
  4. By: Víctor González-Jiménez
    Abstract: I show that stochastic contracts are powerful motivational devices when agents distort probabilities. Stochastic contracts allow the principal to target probabilities that, when distorted by the agent, enhance the agent's motivation to exert effort on the delegated task. This novel source of incentives is absent in traditional contracts. A theoretical framework and an experiment demonstrate that stochastic contracts targeting small probabilities, and thus exposing the agent to a large degree of risk, generate higher performance levels than traditional contracting modalities. A result that contradicts the standard rationale that optimal contracts should feature a tradeoff between insurance and efficiency. This unintuitive finding is attributed to probability distortions caused by likelihood insensitivity - cognitive limitations that restrict the accurate evaluation of probabilities.
    JEL: C91 C92 J16 J24
    Date: 2021–05
  5. By: Guillaume Pommey (Università di Roma "Tor Vergata")
    Abstract: When partnerships come to an end, partners must find a way to efficiently reallocate the commonly owned assets to those who value them the most. This requires that the aforementioned members possess enough financial resources to buy out the others’ shares. I investigate ex post efficient partnership dissolution when agents are ex post cash constrained. I derive necessary and sufficient conditions for ex post efficient partnership dissolution with Bayesian (resp. dominant strategy) incentive compatible, interim individually rational, ex post (resp. ex ante) budget balanced and ex post cash-constrained mechanisms. Ex post efficient dissolution is more likely to be feasible when agents with low (resp. large) cash resources own more (resp. less) initial ownership rights. Furthermore, I propose a simple auction to implement the optimal mechanism. Finally, I investigate second-best mechanisms when cash constraints are such that ex post efficient dissolution is not attainable.
    Keywords: Mechanism design, Partnership, Ex post cash constraints, Property rights theory.
    JEL: D02 D23 D40 D44 D82 C72
    Date: 2021–10–10
  6. By: Markus Kinateder; Luca Paolo Merlino
    Abstract: Players allocate their budget to links, a local public good and a private good. A player links to free ride on others' public good provision. We derive sufficient conditions for the existence of a Nash equilibrium. In equilibrium, large contributors link to each other, while others link to them. Poorer players can be larger contributors if linking costs are sufficiently high. In large societies, free riding reduces inequality only in networks in which it is initially low; otherwise, richer players benefit more, as they can afford more links. Finally, we study the policy implications, deriving income redistribution that increases welfare and personalized prices that implement the efficient solution.
    Date: 2021–10
  7. By: Radostina Shopova
    Abstract: This paper investigates the implications of vertical integration with private labels in the marketplace model opposed to the classic wholesale model. Differently from classic retailers, on a marketplace firms set end-consumer prices and the intermediary collects fees. When introducing a lower-quality version of a product, a marketplace owner does not have an incentive to increase the cost of the outside seller and foreclose him. In order to protect revenues from the seller channel, a marketplace owner overprices his product, compared to a retailer or stand-alone monopolist, and decreases the fee. I demonstrate that offering a lower quality is indeed optimal for both marketplace owner and classic retailer, with the former differentiating more from the seller's offering. This harms the seller less, but improves the consumer surplus less compared to a retailer.
    JEL: D21 D40 L12 L22 L42 L81
    Date: 2021–10
  8. By: Dertwinkel-Kalt, Markus; Wey, Christian
    JEL: L12 L41 D42 K21
    Date: 2021
  9. By: Ran Spiegler
    Abstract: Reverse causality is a common causal misperception that distorts the evaluation of private actions and public policies. This paper explores the implications of this error when a decision maker acts on it and therefore affects the very statistical regularities from which he draws faulty inferences. Using a quadratic-normal parameterization and applying the Bayesian-network approach of Spiegler (2016), I demonstrate the subtle equilibrium effects of a certain class of reverse-causality errors, with illustrations in diverse areas: development psychology, social policy, monetary economics and IO. In particular, the decision context may protect the decision maker from his own reverse-causality causal error. That is, the cost of reverse-causality errors can be lower for everyday decision makers than for an outside observer who evaluates their choices.
    Date: 2021–10
  10. By: Vessela Daskalova; Nicolaas J. Vriend
    Abstract: Players may categorize the strategies available to them. In many games there are different ways to categorize one's strategies (different frames) and which ones players use has implications for the outcomes realized. This paper proposes a model of agents who learn which frames to use through reinforcement. As a case study we fit the model to existing experimental data from coordination games. The analysis shows that the model fits the data well as it matches the key stylized facts. It suggests a trade-off of using coarser versus finer representations of the strategy set when it comes to learning.
    Keywords: Variable frame theory; Coordination games; Categorization; Reinforcement learning; Focal points; Bounded rationality
    JEL: C63 C72 C91 D91
    Date: 2021–08

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