nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒04‒04
thirteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Unilateral Practices, Antitrust Enforcement and Commitments By Rey, Patrick; Polo, Michele
  2. Personalized Pricing, Competition and Welfare By Harold Houba; Evgenia Motchenkova; Hui Wang
  3. Information vs Competition : How Platform Design Affects Profits and Surplus By Piolatto, A.; Schuett, Florian
  4. An evolutionary explanation for why the prior beliefs can be assumed to coincide with the correct ones in the simple Bayesian hypothesis testings By Mitsunobu MIYAKE
  5. Monopoly, Product Quality, and Flexible Learning By Jeffrey Mensch; Doron Ravid
  6. On the Origin of Polarization By John Duffy; Seung Han Yoo
  7. Selling to a principal and a budget-constrained agent By Debasis Mishra; Kolagani Paramahamsa
  8. Public Information Disclosure under Private Information Acquisition By Takashi Ui
  9. A Dutch book argument for belief consistency By Emiliano Catonini
  10. A Crises-Bailouts Game By Bruno Salcedo; Bruno Sultanum; Ruilin Zhou
  11. Reverse Bayesianism and Act Independence By Surajeet Chakravarty; David Kelsey; Joshua C. Teitelbaum
  12. Dynamic Electoral Competition with Voter Loss-Aversion and Imperfect Recall By Lockwood, Ben; Le, Minh; Rockey, James
  13. Gerrymandering and the Limits of Representative Democracy By Kai Hao Yang; Alexander K. Zentefis

  1. By: Rey, Patrick; Polo, Michele
    Abstract: This paper analyses the impact of commitments on antitrust enforcement. These tools, introduced in Europe by the Modernization reform of 2003, are now used intensively by the European Commission and by National Competition Agencies. We consider a setting where a firm can adopt a practice that is either pro- or anti-competitive; the firm knows the nature of the practice whereas the enforcer has only prior beliefs about it. If the firm adopts the practice, the enforcer then decides whether to open a case. When commitments are available, the firm can offer a commitment whenever a case is opened; the enforcer then decides whether to accept it or run a costly investigation that may or may not bring supporting evidence. We show that introducing commitments weakens enforcement when the practice is likely to be anti-competitive. The impact of commitments is however more nuanced when the practice is less likely to be anti-competitive.
    Keywords: Antitrust enforcement ; Commitment ; Remedies ; Deterrence
    JEL: L40 K21 K42
    Date: 2022–03–14
  2. By: Harold Houba (Vrije Universiteit Amsterdam); Evgenia Motchenkova (Vrije Universiteit Amsterdam); Hui Wang (Beijing Zhengjiang Science and Technology Co.)
    Abstract: Data-driven AI pricing algorithms in on-line markets collect consumer information and use it in their pricing technologies. In the simplest symmetric Hotelling's model such technologies reduce prices and profits. We extend Hotelling's model with vertically differentiated products, cost asymmetries and arbitrary adjustment costs. We provide a characterization of competition in personalized pricing: Sellers compete in offering consumer surplus, personalized prices are constrained monopoly prices and social welfare is maximal. For linear adjustment costs, adopting personalized pricing technology is a dominant strategy for both sellers. We derive conditions under which the most efficient seller increases her profit through personalized pricing. While aggregate consumer surplus increases, consumers with high switching costs may be hurt. Finally, we discuss several extensions of our approach such as oligopoly.
    JEL: L1 D43 L13
    Date: 2022–02–24
  3. By: Piolatto, A. (Tilburg University, TILEC); Schuett, Florian (Tilburg University, TILEC)
    Keywords: anonymous information platforms; opaque products; horizontal competition; experience goods; mismatch costs
    Date: 2022
  4. By: Mitsunobu MIYAKE
    Abstract: This paper considers an evolutional process, where a simple Bayesian hypothesis testing is conducted repeatedly in parallel by many testing agents with diversified prior beliefs. Assuming that each of the agents selects a (one-shot) testing strategy to maximize the fitness value believing that the (own) prior belief is true, it is shown that only the testing agents endowed with the correct prior beliefs are survived eventually. This result provides an explanation for why the prior belief of the agent can be assumed to coincide with the correct one in the Bayesian hypothesis testing, as if the agent knows the true probability assigned by the nature, without introducing the longterm learning processes.
    Date: 2022–02–18
  5. By: Jeffrey Mensch; Doron Ravid
    Abstract: A seller offers a buyer a schedule of transfers and associated product qualities, as in Mussa and Rosen (1978). After observing this schedule, the buyer chooses a flexible costly signal about his type. We show it is without loss to focus on a class of mechanisms that compensate the buyer for his learning costs. Using these mechanisms, we prove the quality always lies strictly below the efficient level. This strict downward distortion holds even if the buyer acquires no information or when the buyer's posterior type is the highest possible given his signal, reversing the ``no distortion at the top'' feature that holds when information is exogenous.
    Date: 2022–02
  6. By: John Duffy (Department of Economics, University of California, Irvine, California, 92697); Seung Han Yoo (Department of Economics, Korea University, 145 Anam-ro, Seongbuk-gu, Seoul, Republic of Korea, 02841)
    Abstract: We provide a model of group sorting or polarization based on group identity alone. In our model, agents differ from one another in terms of a binary group identity. Groups may also differ in terms of the distribution of abilities, but the distribution of abilities by group is uncertain and both groups are ex-ante equally likely to be distributed in the same way. Each agent's ability is private information, but group identity is publicly observable. Young agents make a decision as to which of two locations they will reside in when old and play a stage game with others when they are old, based on their private histories from a previous stage game played in the location where they were born (and young). We show that, in equilibrium, agents endogenously sort themselves according to their group identity to two different locations under rational belief updating, and we identify conditions under which the society becomes completely polarized with members of each group rationally choosing to congregate in distinct locations.
    Keywords: Polarization, group bias, homophily, private monitoring, sorting, Bayesian learning.
    JEL: C72 C73 D83
    Date: 2022
  7. By: Debasis Mishra; Kolagani Paramahamsa
    Abstract: We analyze a model of selling a single object to a principal-agent pair who want to acquire the object for a firm. The principal and the agent have different assessments of the object's value to the firm. The agent is budget-constrained while the principal is not. The agent participates in the mechanism, but she can (strategically) delegate decision-making to the principal. We derive the revenue-maximizing mechanism in a two-dimensional type space (values of the agent and the principal). We show that below a threshold budget, a mechanism involving two posted prices and three outcomes (one of which involves randomization) is the optimal mechanism for the seller. Otherwise, a single posted price mechanism is optimal.
    Date: 2022–02
  8. By: Takashi Ui (Hitotsubashi University)
    Abstract: A policymaker discloses public information to interacting agents who also acquire costly private information. More precise public information reduces the precision and cost of acquired private information. Considering this effect, what disclosure rule should the policymaker adopt? We address this question under two alternative assumptions using a linear quadratic Gaussian game with arbitrary quadratic material welfare and convex information costs. First, the policymaker knows the cost of private information and adopts an optimal disclosure rule to maximize the expected welfare. Second, the policymaker is uncertain about the cost and adopts a robust disclosure rule to maximize the worst-case welfare. Depending on the elasticity of marginal cost, an optimal rule is qualitatively the same as that in the case of either a linear information cost or exogenous private information. Full disclosure is robust if and only if it is optimal under some information costs, even when no disclosure is optimal under other information costs.
    Keywords: public information; private information; crowding-out effect; linear quadratic Gaussian game; optimal disclosure; robust disclosure; information cost.
    JEL: C72 D82 E10
    Date: 2022–03
  9. By: Emiliano Catonini
    Abstract: An agent progressively learns about a state of the world. A bookmaker is ready to offer one bet after every new discovery. I say that the agent is Dutch-booked when she is willing to accept every single bet, but her expected payoff is negative under each state, where the expected payoff is computed with the objective probabilities of different discoveries conditional on the state. I introduce a rule of coherence among beliefs after counterfactual discoveries that is necessary and sufficient to avoid being Dutch-booked. This rule characterizes an agent who derives all her beliefs with Bayes rule from the same Lexicographic Conditional Probability System (Blume, Brandenburger and Dekel, 1991).
    Date: 2022–02
  10. By: Bruno Salcedo; Bruno Sultanum; Ruilin Zhou
    Abstract: This paper studies the optimal design of a liability-sharing arrangement as an infinitely repeated game. We construct a noncooperative model with two agents: one active and one passive. The active agent can take a costly and unobservable action to reduce the incidence of crisis, but a crisis is costly for both agents. When a crisis occurs, each agent decides unilaterally how much to contribute mitigating it. For the one-shot game, when the avoidance cost is too high relative to the expected loss of crisis for the active agent, the first-best is not achievable. That is, the active agent cannot be induced to put in effort to minimize the incidence of crisis in a static game. We show that with the same stage-game environment, the first-best cannot be implemented as a perfect public equilibrium (PPE) of the infinitely repeated game either. Instead, at any constrained efficient PPE, the active agent "shirks" infinitely often, and when crisis happens, the active agent is "bailed out" infinitely often. The frequencies of crisis and bailout are endogenously determined in equilibrium. The welfare optimal equilibrium being characterized by recurrent crises and bailouts is consistent with historical episodes of financial crises, which features varying frequency and varied external responses for troubled institutions and countries in the real world. We explore some comparative statics of the PPEs of the repeated game numerically.
    Keywords: Bailouts; Moral Hazard; Repeated Games; Imperfect monitoring; Second best
    JEL: C73 D82
    Date: 2022–01–05
  11. By: Surajeet Chakravarty (University of Exeter); David Kelsey (Nottingham University Business School); Joshua C. Teitelbaum (Georgetown University)
    Abstract: Karni and Viero (2013) propose a model of belief revision under growing awareness— - reverse Bayesianism - which posits that as a person becomes aware of new acts, consequences, or act-consequence links, she revises her beliefs over an expanded state space in a way that preserves the relative likelihoods of events in the original state space. A key feature of the model is that reverse Bayesianism does not fully determine the revised probability distribution. We provide an assumption— - act independence - that imposes additional restrictions on reverse Bayesian belief revision. We show that with act independence knowledge of the probabilities of the new act events in the expanded state space is sufficient to fully determine the revised probability distribution in each case of growing awareness. We also explore what additional knowledge is required for reverse Bayesianism to pin down the revised probabilities without act independence.
    Keywords: Keywords: act independence, reverse Bayesianism, unawareness.
    Date: 2022–06
  12. By: Lockwood, Ben (University of Warwick); Le, Minh (University of Warwick); Rockey, James (University of Birmingham)
    Abstract: This paper explores the implications of voter loss-aversion and imperfect recall for the dynamics of electoral competition in a simple Downsian model of repeated elections. We first establish a benchmark result: when the voters’ reference point is forward-looking, there are a continuum of rational expectations equilibria (REE). When voters are backward-looking i.e. the reference point is last period’s recalled policy, interesting dynamics only emerge when voters have imperfect recall about that policy. Then, the interplay between the median voter’s reference point and political parties’ choice of platforms generates a dynamic process of polarization (or de-polarization). Under the assumption that parties are risk-neutral, platforms monotonically converge over time to a long-run equilibrium, which is always a REE. When parties are risk-averse, dynamic incentives also come into play, and generally lead to more policy moderation, resulting in equilibria that are more moderate than the most moderate REE JEL Classification: D72 ; D81
    Keywords: electoral competition ; repeated elections ; loss-aversion ; imperfect recall ; advantage
    Date: 2021
  13. By: Kai Hao Yang (Cowles Foundation and School of Management, Yale University); Alexander K. Zentefis (Yale School of Management)
    Abstract: We assess the capacity of gerrymandering to undermine the will of the people in a representative democracy. Citizens have political positions represented on a spectrum, and electoral maps separate people into districts. We show that unrestrained gerrymandering can severely distort the composition of a legislature, potentially leading half the population to lose all representation of their views. This means that, under majority rule in the congress, gerrymandering enables politicians to enact any legislation of their choice as long as it falls within the interquartile range of the political spectrum. Just as worrisome, gerrymandering can rig any legislation to pass instead of the median policy, which would otherwise prevail in a referendum against any other choice.
    Keywords: Gerrymandering, representatives, legislature, Bayesian persuasion
    JEL: D72 D78 D82 K16
    Date: 2022–03

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