nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒04‒25
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Allocating Scarce Information By Richard T. Holden; Anup Malani; Chris Teh
  2. When is a Contrarian Adviser Optimal? By Evans, R., Reiche, S.; Reiche, S.
  3. Strategic Communication With a Small Conflict of Interest By Francesc Dilmé
  4. Simple contracts with adverse selection and moral hazard By Gottlieb, Daniel; Moreira, Humberto
  5. Nonlinear Pricing in Oligopoly: How Brand Preferences Shape Market Outcomes By Gomes, Renato; Lozachmeur, Jean-Marie; Maestri, Lucas
  6. Prerationality as Avoiding Predictably Regrettable Consequences By Hammond, Peter J.
  7. Renegotiation and Discrimination in Symmetric Procurement Auctions By Leandro Arozamena; Federico Weinschelbaum; Juan-José Ganuza
  8. Regulating Platform Fees under Price Parity By Gomes, Renato; Mantovani, Andrea
  9. Wage-rise contract and mixed Cournot duopoly competition with profit-maximizing and socially concerned firms By Ohnishi, Kazuhiro
  10. Too Much of A Good Thing? By Sanktjohanser, Anna; Hörner, Johannes
  11. The Texas Shoot-Out under Knightian Uncertainty By Bauch, Gerrit; Riedel, Frank
  12. Conflicts of Interest, Ethical Standards, and Competition in Legal Services By Bouckaert, Jan; Stennek, Johan
  13. Most-Favored Entry Clauses in Drug Patent Litigation Settlements as a Potential Reverse Payment By Keith M. Drake; Thomas McGuire
  14. Bertrand competition in vertically related markets By Tomomichi Mizuno; Kazuhiro Takauchi
  15. Multiproduct Cost Passthrough: Edgeworth’s Paradox Revisited By Mark Armstrong; John Vickers

  1. By: Richard T. Holden; Anup Malani; Chris Teh
    Abstract: Sender conveys scarce information to a number of receivers to maximize the sum of receiver payoffs. Each receiver’s payoff depends on the state of the world and an action she takes. The optimal action is state contingent. Under mild regularity conditions, we show that the payoff of each receiver is convex in the amount of information she receives. Thus, it is optimal for Sender to target information to a single receiver. We then study four extensions in which interior information allocations are optimal.
    JEL: D60 D61 D80 D83
    Date: 2022–03
  2. By: Evans, R., Reiche, S.; Reiche, S.
    Abstract: We compare contrarian to conformist advice, a contrarian (conformist) expert being one whose preference bias is against (for) the decision-maker's prior optimal decision. We show that optimality of an expert depends on characteristics of prior information and learning. If either the expert is fully informed, or fine information can be acquired at low cost, then for symmetric distributions F of the state a conformist (contrarian) is superior if F is single-peaked (bimodal). If only coarse information can be acquired then a contrarian acquires more information on average, hence is superior. If information is verifiable a contrarian has less incentive to hide unfavorable evidence, and again is superior.
    Keywords: Optimal Delegation, Information Acquisition, Evidence Disclosure, Advice, Groupthink
    JEL: D82 D83 D73
    Date: 2022–03–28
  3. By: Francesc Dilmé
    Abstract: This paper analyzes strategic information transmission between a sender and a receiver with similar objectives. We provide a first-order approximation of the equilibrium behavior in the general version of the Crawford and Sobel’s (1982) model with a small bias. Our analysis goes beyond the usual uniform-quadratic setting: we uncover how the state-dependent bias and the non-uniform state distribution influence the precision with which each state of the world is communicated. We illustrate the approach by providing novel comparative statics results in different applications.
    Keywords: Strategic Communication, Small Bias
    JEL: C72 D82 D83
    Date: 2022–04
  4. By: Gottlieb, Daniel; Moreira, Humberto
    Abstract: We study a principal-agent model with moral hazard and adverse selection. Risk-neutral agents with limited liability have arbitrary private information about the distribution of outputs and the cost of effort. We show that under a multiplicative separability condition, the optimal mechanism offers a single contract. This condition holds, for example, when output is binary. If the principal’s payoff must also satisfy free disposal and the distribution of outputs has the monotone likelihood ratio property, the mechanism offers a single debt contract. Our results generalize if the output distribution is “close” to multiplicatively separable. Our model suggests that offering a single contract may be optimal in environments with adverse selection and moral hazard when agents are risk neutral and have limited liability.
    Keywords: principal-agent problem; contract theory; mechanism design
    JEL: J1
    Date: 2021–07–23
  5. By: Gomes, Renato; Lozachmeur, Jean-Marie; Maestri, Lucas
    Abstract: We study oligopolistic competition by firms practicing second-degree price discrimination. In line with the literature on demand estimation, our theory allows for comovements between consumers’ taste for quality and propensity to switch brands. If low-type consumers are sufficiently less (more) brand loyal than high types, (i) quality provision is inefficiently low at the bottom (high at the top) of the product line, and (ii) informational rents are negative (positive) for high types, while positive (negative) for low types. We produce testable comparative statics on pricing and quality provision, and show that more competition (in that consumers become less brand-loyal) is welfare-decreasing whenever it tightens incentive constraints (so much so that monopoly may be welfare-superior to oligopoly). Interestingly, pure-strategy equilibria fail to exist whenever brand loyalty is sufficiently different across consumers types. Accordingly, price/quality dispersion ensues from the interplay between self-selection constraints and heterogeneity in brand loyalty.
    Keywords: competition; price discrimination; asymmetric information; preference correlation; price dispersion
    JEL: D82
    Date: 2022–03–29
  6. By: Hammond, Peter J. (Dept. of Economics, University of Warwick)
    Abstract: Following previous work on consequentialist decision theory, we consider an unrestricted domain of finite decision trees, including continuation subtrees, with : (i) decision nodes where the decision maker must make a move ; (ii) chance nodes at which a “roulette lottery” with exogenously specified strictly positive probabilities is resolved ; (iii) event nodes at which a “horse lottery” is resolved. A complete family of binary conditional base preference relations over Anscombe–Aumann lottery consequences is defined to be “prerational” just in case there exists a behaviour rule that is defined throughout the tree domain which is explicable as avoiding, under all predictable circumstances, consequences that are regrettable given what is feasible. Prerationality is shown to hold if and only if all conditional base preference relations are complete and transitive, while also satisfying both the independence axiom of expected utility theory and a strict form of Anscombe and Aumann’s extension of Savage’s sure thing principle. Assuming that the base relations satisfy non-triviality and a generalized form of state independence that holds even when consequence domains are state dependent, prerationality combined with continuity on Marschak triangles is equivalent to representation by a refined subjective expected utility function that excludes zero probabilities.
    Keywords: Prerational base relations ; rational planning ; decision trees ; regrettable consequences ; Anscombe–Aumann lotteries ; preference ordering ; independence axiom ; sure-thing principle ; subjective probability ; subjective expected utility ; Bayesian rationality ; state independence JEL codes: D81
    Date: 2022
  7. By: Leandro Arozamena; Federico Weinschelbaum; Juan-José Ganuza
    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 specication is a tool for providing a comparative advantage to the favored firm.
    Keywords: Auctions, Favoritism, Auction Design, Renegotiation, Corruption.
    JEL: C72 D44 D82
  8. By: Gomes, Renato; Mantovani, Andrea
    Abstract: Online intermediaries greatly expand consumer information, but also raise sellers’ marginal costs by charging high commissions. To prevent disintermediation, some platforms adopted price parity and anti-steering provisions, which restrict sellers’ ability to use alternative sales channels. Whether to uphold, reform, or ban these provisions has been at the center of the policy debate, but, so far, little consensus has emerged. As an alternative, this paper studies how to cap platforms’ commissions. The utilitarian cap reflects the Pigouvian precept according to which the platform should charge net fees no greater than the informational externality it exerts on other market participants.
    Keywords: platforms, price parity; regulation; commission caps; extreme value theory
    JEL: D83 L10 L41
    Date: 2022–03–28
  9. By: Ohnishi, Kazuhiro
    Abstract: This paper investigates a Cournot game model with a nonlinear demand function where a profit-maximizing firm competes against a socially concerned firm. The timing of the game is as follows. In stage one, each firm non-cooperatively decides whether to offer a wage-rise contract policy as a strategic commitment device. In stage two, after observing the rival’s decision in stage one, each firm non-cooperatively chooses its actual output. The paper presents the equilibrium solutions of the model.
    Keywords: Cournot model; Corporate social responsibility; Profit-maximizing firm; Socially concerned firm; Wage-rise contract
    JEL: C72 D21 L20
    Date: 2022–03–24
  10. By: Sanktjohanser, Anna; Hörner, Johannes
    Abstract: We consider a repeated game, in which due to private information and a lack of flexible transfers, cooperation cannot be sustained efficiently. In each round, the buyer either buys from the seller or takes an outside option. The fluctuating outside option may be public or private information. When the buyer visits, the seller chooses what quality to provide. We find that the buyer initially forgoes mutually beneficial trades before then visiting more often than he would like to, myopically. Under private information, the relationship recurrently undergoes gradual self-reinforcing downturns when trust is broken and instantaneous recoveries when loyalty is shown.
    Keywords: Trust; Loyalty; Imperfect Monitoring
    JEL: C72 C73 C78
    Date: 2022–04–04
  11. By: Bauch, Gerrit (Center for Mathematical Economics, Bielefeld University); Riedel, Frank (Center for Mathematical Economics, Bielefeld University)
    Abstract: The allocation of a co-owned company to a single owner using the Texas Shoot-Out mechanism with private valuations is investigated. We identify Knightian Uncertainty about the peer’s distribution as the reason for its deterrent effect of an immature dissolving. Modeling uncertainty by a compact environment around a reference distribution *F* in the Prohorov metric, we derive the optimal price announcement for an ambiguity averse divider. The divider hedges against uncertainty for valuations close to the median of *F*, while extracting expected surplus for high and low valuations. The outcome of the mechanism is efficient for valuations around the median. A risk neutral co-owner prefers to be the chooser, even strictly so for any valuation under low levels of uncertainty and for extreme valuations under high levels of uncertainty.
    Keywords: Knightian Uncertainty in Games, Texas Shout-Out, Partnership Dissolution
    Date: 2022–04–14
  12. By: Bouckaert, Jan (University of Antwerp); Stennek, Johan (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: We study how the legal profession manages representational conflicts of interest. Such conflicts arise when the same law firm represents clients with adverse interests. They may compromise the legal process, ultimately jeopardizing social welfare. We argue that current ethical standards, emphasizing disqualification over Chinese walls, may actually worsen the clients’ situation. Instead, the clients’ interests are today mainly protected by law firms being small. Despite low market concentration, law firms enjoy high earnings as representational conflicts create negative network externalities at the firm level. These profits are not eroded even in the long run as entry occurs through firm splitups.
    Keywords: law firms; professional services; dual representation; representational conflicts of interest; ethical standards; Chinese walls; recusals; negative network externalities; competition; self-regulation
    JEL: K40 L13 L22 L44 L84
    Date: 2022–04
  13. By: Keith M. Drake; Thomas McGuire
    Abstract: Settlements of drug patent disputes that involve a potential payment from the brand to the generic signal a possible collusive profit split with a threat to competition, and have undergone intensive scrutiny in the literature on law and economics. A common feature of these brand-generic settlements, so-called “most-favored entry” (MFE) clauses, have not been investigated to the same extent. The expectation that brand drug companies make settlement decisions rationally implies that an otherwise unexplained brand payment above savings from expected future litigation costs derives from a delay in competition achieved by the settlement. This paper applies the condition of brand rationality to settlements with MFE clauses, with the added consideration that an MFE clause may affect two dates: the date of entry for the settling generic and the date of entry of third-party generic challengers. A brand payment from an MFE clause above future expected litigation costs implies delays in at least one and possibly two of these expected dates for competition. We find that MFE clauses can constitute a reverse payment. When a payment takes the form of an MFE clause, the pay-above-saved-litigation-cost criterion is, however, vulnerable to suggesting that a settlement is not anticompetitive, when in fact it is.
    JEL: D22 D43 K21 L41
    Date: 2022–02
  14. By: Tomomichi Mizuno (Graduate School of Economics, Kobe University); Kazuhiro Takauchi (Faculty of Business and Commerce, Kansai University / Research Fellow, Graduate School of Economics, Kobe University)
    Abstract: We build a successive Bertrand model with homogenous good. We show that increasing the pro- duction efficiency of upstream industry can reduce upstream Firms' profits. We also show that increasing the production efficiency of downstream industry may reduce downstream Firms' prof- its. Hence, an industrial policy that aims at improving production efficiency may be undesirable for Firms.
    Date: 2022–04
  15. By: Mark Armstrong; John Vickers
    Abstract: Edgeworth’s paradox of taxation occurs when an increase in the unit cost of a product causes a multiproduct monopolist to reduce prices. We give simple illustrations of the paradox, we show how it can arise with uniform pricing, and we give an analysis of the case of linear marginal cost and demand conditions. We show how the matrix of cost-passthrough terms must be similar to a positive definite matrix. When the firm supplies two substitute products we show how the paradox always occurs with a suitable choice of cost function. We then show a connection between Ramsey pricing and the paradox in a form relating to consumer surplus, and use it to find further examples where consumer surplus increases with cost.
    Date: 2022–03–25

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