nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒06‒13
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Personalized Pricing and Competition By Rhodes, Andrew; Zhou, Jidong
  2. Bayesian social aggregation with accumulating evidence By Marcus Pivato
  3. Acquisition, (Mis)use and Dissemination of Information The Blessing of Cursedness and Transparency By Franz Ostrizek; Elia Sartori
  4. Excessive Competition on Headline Prices By Inderst, Roman; Obradovits, Martin
  5. Collective Hold-Up By Matias Iaryczower; Santiago Oliveros
  6. Dynamic screening By David Lagziel; Ehud Lehrer
  7. Social unacceptability for simple voting procedures By Ahmad Awde; Mostapha Diss; Eric Kamwa; Julien Yves Rolland; Abdelmonaim Tlidi
  8. A Theory of Hypocrisy By Alice Hallman; Daniel Spiro
  9. A Class of Behavioral Models for the Profit-Maximizing Firm By Philippe Choné; Laurent Linnemer
  10. A Large Population Approach to Implementing Efficiency with Minimum Inequality By Sarvesh Bandhu; Ratul Lahkar
  11. Acquisition of Costly Information in Data-Driven Decision Making By Lukas Janasek
  12. Present Bias in the Labor Market – When it Pays to be Naive By Matthias Fahn; Regina Seibel
  13. Loss Leading as a Threat to Brands By Inderst, Roman; Obradovits, Martin
  14. A counter example to the theorems of social preference transitivity and social choice set existence under the majority rule By Fujun Hou
  15. Core and Stability Notions in Many-to-one Matching Markets with Indifferences By Agustín G. Bonifacio; Noelia Juarez; Pablo Neme; Jorge Oviedo
  16. AI Adoption in a Competitive Market By Joshua S. Gans
  17. Existence of an Equilibrium in Arrowian Markets for Consumption Externalities By Jean-Marc Bonnisseau; Elena L. del Mercato; Paolo Siconolfi

  1. By: Rhodes, Andrew; Zhou, Jidong
    Abstract: We study personalized pricing (or first-degree price discrimination) in a general oligopoly model. In the short-run, when the market structure is fixed, the impact of personalized pricing hinges on the degree of market coverage (i.e., how many consumers buy). If coverage is high (e.g., because the production cost is low, or the number of firms is large), personalized pricing intensifies competition and so harms firms but benefits consumers, whereas the opposite is true if coverage is low. However in the long-run, when the market structure is endogenous, personalized pricing always benefits consumers because it induces the socially optimal level of firm entry. We also study the asymmetric case where some firms can use consumer data to price discriminate while others cannot, and show it can be worse for consumers than when either all or no firms can personalize prices.
    Keywords: personalized pricing, competition, price discrimination, consumer data
    JEL: D43 D82 L13
    Date: 2022–05
  2. By: Marcus Pivato (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)
    Abstract: How should we aggregate the ex ante preferences of Bayesian agents with heterogeneous beliefs? Suppose the state of the world is described by a random process that unfolds over time. Different agents have different beliefs about the probabilistic laws governing this process. As new information is revealed over time by the process, agents update their beliefs and preferences via Bayes rule. Consider a Pareto principle that applies only to preferences which remain stable in the long run under these updates. I show that this "eventual Pareto" principle implies that the social planner must be a utilitarian. But it does not impose any relationship between the beliefs of the individuals and those of the planner, except for a weak compatibility condition
    Keywords: Subjective expected utility,Utilitarian,Ex ante Pareto,Stochastic process
    Date: 2022
  3. By: Franz Ostrizek; Elia Sartori
    Abstract: We study strategic interactions when players observe equilibrium statistics, focusing on First, their endogenous precision as signals of the fundamental; and second, agents’ well-documented difficulty in learning from such signals. We define the novel notion of cursed expectations equilibrium with information acquisition which disciplines information acquisition in a setting with incorrect learning by means of a subjective envelope condition: agents correctly anticipate their actions but incorrectly deem them optimal. Cursed agents use and acquire more private information, which counteracts suboptimal information dissemination and increases welfare. Transparency crowds out private information but is always beneficial; other policy instruments have paradoxical effects.
    Date: 2022–05
  4. By: Inderst, Roman; Obradovits, Martin
    Abstract: In a variety of purchasing situations, consumers may focus primarily on headline prices, ignoring the full costs associated with acquiring and maintaining a product or service contract. Even when this is the case, it is widely believed that intense competition would adequately protect consumers (the so-called “waterbed effect”). However, in a tractable model of imperfect competition and vertical differentiation, we show that when consumers exhibit context-dependent preferences, competition may rather exacerbate their and society’s harm. Then, consumer protection policy must sufficiently constrain hidden costs and fees so that competition, along with high-quality firms’ incentives to educate consumers, can restore efficiency.
    Keywords: shrouded charges,hidden fees,price competition,shopping,salience,unshrouding
    JEL: D11 D18 D21 D43 D60 L11 L13 L15
    Date: 2021
  5. By: Matias Iaryczower; Santiago Oliveros
    Abstract: We consider dynamic processes of coalition formation in which a principal bargains sequentially with a group of agents. This problem is at the core of a variety of applications in economics and politics, including a lobbyist seeking to pass a bill, an entrepreneur setting up a start-up, or a firm seeking the approval of corrupt bureaucrats. We show that when the principal’s willingness to pay is high, strengthening the bargaining position of the agents generates delay and reduces agents’ welfare. This occurs in spite of the lack of informational asymmetries or discriminatory offers. When this collective action problem is severe enough, agents prefer to give up considerable bargaining power in favor of the principal.
    JEL: C78 D7 D71 D72
    Date: 2022–04
  6. By: David Lagziel; Ehud Lehrer
    Abstract: We study dynamic screening problems where elements are subjected to noisy evaluations and, in every stage, some of the elements are rejected while the remaining ones are independently re-evaluated in subsequent stages. We prove that, ceteris paribus, the quality of a dynamic screening process is not monotonic in the number of stages. Specifically, we examine the accepted elements' values and show that adding a single stage to a screening process may produce inferior results, in terms of stochastic dominance, whereas increasing the number of stages substantially leads to a first-best outcome.
    Date: 2022–04
  7. By: Ahmad Awde (FEMTO-ST - Franche-Comté Électronique Mécanique, Thermique et Optique - Sciences et Technologies (UMR 6174) - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE] - ENSMM - Ecole Nationale Supérieure de Mécanique et des Microtechniques - CNRS - Centre National de la Recherche Scientifique - UTBM - Université de Technologie de Belfort-Montbeliard); Mostapha Diss (CRESE - Centre de REcherches sur les Stratégies Economiques (UR 3190) - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE]); Eric Kamwa (LC2S - Laboratoire caribéen de sciences sociales - UA - Université des Antilles - CNRS - Centre National de la Recherche Scientifique); Julien Yves Rolland (LMB - Laboratoire de Mathématiques de Besançon (UMR 6623) - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE] - CNRS - Centre National de la Recherche Scientifique - UB - Université de Bourgogne); Abdelmonaim Tlidi (MAE2D - Laboratory MAE2D, University of Abdelmalek Essaadi)
    Abstract: A candidate is said to be socially acceptable if the number of voters who rank her among the most preferred half of the candidates is at least as large as the number of voters who rank her among the least preferred half (Mahajne and Volij, 2018). For every voting profile, there always exists at least one socially acceptable candidate. This candidate may not be elected by some well-known voting rules, which may even lead in some cases to the election of a socially unacceptable candidate, the latter being a candidate such that the number of voters who rank her among the most preferred half of the candidates is strictly less than the number of voters who rank her among the least preferred half. In this paper, our contribution is twofold. First, since the existence of a socially unacceptable candidate is not always guaranteed, we determine the probabilities of the existence of such a candidate. Then, we evaluate how often the Plurality rule, the Negative Plurality rule, the Borda rule and their two-round versions can elect a socially unacceptable candidate. We perform our calculations under both the Impartial Culture and the Impartial Anonymous Culture,
    Keywords: Voting,Social Unacceptability,Scoring Rules,Probability
    Date: 2022–03–05
  8. By: Alice Hallman; Daniel Spiro
    Abstract: This paper explains the occurrence of hypocrisy – when the by-society most despised types pretend to be the most revered types. Real-world phenomena include pedophile priests, sex-offender feminists and seemingly very busy dispensable office workers. Building on the signaling framework of Bernheim (1994) – where payoffs consist of an intrinsic cost of falsifying yourself, and a concern for social esteem – we show conditions for emergence of hypocrisy in equilibrium. In such equilibria the most despised types along with the most revered types behave normatively, others do not. Thus, in equilibrium there are “rumors” about those acting the most normatively – society infers that they are either truly normative or despised, but one cannot know who is who. This is to be distinguished from “conformity” – where the most normative and almost-normative types fully follow a social norm. Whether conformity or hypocrisy will arise in equilibrium depends on the cost of falsification, and the number of hypocrites depends on the weight of social esteem. Our theory thus shows how cultural parameters map into equilibrium culture.
    Keywords: social esteem, hypocrisy, conformity, social norm
    JEL: D70 D91 Z10
    Date: 2022
  9. By: Philippe Choné; Laurent Linnemer
    Abstract: We study the behavior of a firm that consistently maximizes a misspecified profit function. We provide an equilibrium concept where the misspecification error remains undetected. We examine the uniqueness and stability of the equilibria. The model of the price-taking firm belongs to this class. In one of these models, the cost-taking firm, the equilibrium price increases with fixed costs. The behavioural price can be lower or higher than the rational price, meaning consumers can benefit from the lack of rationality. Finally in a long-run perspective where the cost is endogenous, we show that the behavioral and rational firms end with the same level of output.
    Keywords: behavioural model of a firm, misspecified profit function, fixed costs
    JEL: L12 L21 L23 L25 M41
    Date: 2022
  10. By: Sarvesh Bandhu (Indian Institute of Management, Bangalore); Ratul Lahkar (Ashoka University)
    Abstract: We consider the implementation of efficiency with minimum inequality in a large population model of negative externalities. Formally, the model is one of tragedy of the commons with the aggregate strategy at the efficient state being lower than at the Nash equilibrium. A planner can restore efficiency by imposing an externality equivalent tax and then redistribute the tax revenue as transfers to lower inequality. We characterize the transfer vector that minimizes inequality at the efficient state subject to incentive compatibility and budget balance. We then construct a mechanism that implements efficiency with minimum inequality in dominant strategies. We also show that minimizing inequality at the efficient state maximizes the minimum payoff at efficiency. But it is not equivalent to implementing the Rawlsian social choice function.
    Date: 2022–03–15
  11. By: Lukas Janasek (Institute of Economic Studies, Charles University & Institute of Information Theory and Automation, Czech Academy of Sciences, Prague, Czech Republic)
    Abstract: This paper formulates and solves an economic decision problem of the acquisition of costly information in data-driven decision making. The paper assumes an agent predicting a random variable utilizing several costly explanatory variables. Prior to the decision making, the agent learns about the relationship between the random variables utilizing its past realizations. During the decision making, the agent decides what costly variables to acquire and predicts using the acquired variables. The agent´s utility consists of the correctness of the prediction and the costs of the acquired variables. To solve the decision problem, we split the decision process into two parts: acquisition of variables and prediction using the acquired variables. For the prediction, we propose an approach for training a single predictive model accepting any combination of acquired variables. For the acquisition, we propose two methods using supervised machine learning models: a backward estimation of the expected utility of each variable and a greedy acquisition of variables based on a myopic estimate of the expected utility. We evaluate the methods on two medical datasets. The results show that the methods acquire the costly variables efficiently.
    Keywords: costly information, data-driven decision-making, machine learning
    JEL: C44 C45 C52 C73 D81 D83
    Date: 2022–05
  12. By: Matthias Fahn; Regina Seibel (University of Zurich)
    Abstract: We study optimal employment contracts for present-biased employees if firms cannot commit to long-term contracts. Assuming that an employee’s effort increases his chances to obtain a future benefit, we show that individuals who are naive about their present bias will actually be better off than sophisticated or time-consistent individuals. Moreover, firms might benefit from being ignorant about the extent of an employee’s naivet´e. Our results also indicate that naive employees might be harmed by policies such as employment protection or a minimum wage, whereas sophisticated employees are better off.
    Keywords: Present bias, labor markets, on-the-job search, moral hazard
    JEL: D21 D90 J31 J32
    Date: 2022–04
  13. By: Inderst, Roman; Obradovits, Martin
    Abstract: Manufacturers frequently resist heavy discounting of their products by retailers, especially when they are used as so-called loss leaders. Since low prices should increase demand and manufacturers could simply refuse to fund deep price promotions, such resistance is puzzling at first sight. We explain this phenomenon in a model in which price promotions cause shoppers to potentially reassess the relative importance of quality and price, as they evaluate these attributes relative to a market-wide reference point. With deep discounting, quality can become relatively less important, eroding brand value and the bargaining position of brand manufacturers. This reduces their profits and potentially even leads to a delisting of their products. Linking price promotions to increased one-stop shopping and more intense retail competition, our theory also contributes to the explanation of the rise of store brands.
    Keywords: loss leading,relative thinking,reference-depending preferences,product positioning,vertical differentiation,price competition,price promotion
    JEL: D11 D22 D43 L11 L15
    Date: 2021
  14. By: Fujun Hou
    Abstract: I present an example in which the individuals' preferences are strict orderings, and under the majority rule, a transitive social ordering can be obtained and thus a non-empty choice set can also be obtained. However, the individuals' preferences in that example do not satisfy any conditions (restrictions) of which at least one is required by Inada (1969) for social preference transitivity under the majority rule. Moreover, the considered individuals' preferences satisfy none of the conditions of value restriction (VR), extremal restriction (ER) or limited agreement (LA), some of which is required by Sen and Pattanaik (1969) for the existence of a non-empty social choice set. Therefore, the example is an exception to a number of theorems of social preference transitivity and social choice set existence under the majority rule. This observation indicates that the collection of the conditions listed by Inada (1969) is not as complete as might be supposed. This is also the case for the collection of conditions VR, ER and LA considered by Sen and Pattanaik (1969). This observation is a challenge to some necessary conditions in the current social choice theory. In addition to seeking new conditions, one possible way to deal with this challenge may be, from a theoretical prospective, to represent the identified conditions (such as the VR, ER and LA) in terms of a common mathematical tool, and then, people may find more.
    Date: 2022–05
  15. By: Agustín G. Bonifacio (Universidad Nacional de San Luis/CONICET); Noelia Juarez (Universidad Nacional de San Luis/CONICET); Pablo Neme (Universidad Nacional de San Luis/CONICET); Jorge Oviedo (Universidad Nacional de San Luis/CONICET)
    Abstract: In a many-to-one matching model with responsive preferences in which indifferences are allowed, we study three notions of core, three notions of stability, and their relationships. We show that (i) the core contains the stable set, (ii) the strong core coincides with the strongly stable set, and (iii) the super core coincides with the super stable set. We also show how the core and the strong core in markets with indifferences relate to the stable matchings of their associated tie-breaking strict markets.
    Keywords: Matching with indifferences; Stability; Strong Stability; Super Stability; Core; Strong Core; Super Core
    JEL: C78 D47
    Date: 2022–04
  16. By: Joshua S. Gans
    Abstract: Economists have often viewed the adoption of artificial intelligence (AI) as a standard process innovation where we expect that efficiency will drive adoption in competitive markets. This paper models AI based on recent advances in machine learning that allow firms to engage in better prediction. Using prediction of demand, it is demonstrated that AI adoption is a complement to variable inputs whose levels are directly altered by predictions and use is economised by them (that is, labour). It is shown that, in a competitive market, this increases the short-run elasticity of supply and may or may not increase average equilibrium prices. There are generically externalities in adoption with this reducing the profits of non-adoptees when variable inputs are important and increasing them otherwise. Thus, AI does not operate as a standard process innovation and its adoption may confer positive externalities on non-adopting firms. In the long-run, AI adoption is shown to generally lower prices and raise consumer surplus in competitive markets.
    JEL: D21 D41 D81 O31
    Date: 2022–04
  17. By: Jean-Marc Bonnisseau (Paris School of Economics, Université Paris 1 Panthéon-Sorbonne, Centre d'Economie de la Sorbonne); Elena L. del Mercato (Paris School of Economics, Université Paris 1 Panthéon-Sorbonne, Centre d'Economie de la Sorbonne); Paolo Siconolfi (Graduate School of Business - Columbia University)
    Abstract: We study the existence of quasi-equilibria and equilibria for pure exchange economies with consumption externalities and Arrowian markets with personalized Lindahl prices. We provide example showing first that quasi-equilibria of the externality economy fail to exist under assumptions guaranteeing existence for economies without externalities. We show that the externality economy has identical equilibrium allocations of an appropriately defined constant returns to scale production economy without externalities. We exploit this equivalence to map sufficient conditions for the existence of quasi equilibria and equilibria of the production economy into sufficient conditions of the pure exchange economy with externalities, thereby unveiling suitable irreducibility conditions and survival conditions
    Keywords: Consumption externalities; markets for externalities; existence of an equilibrium; irreducibility and survival
    JEL: C62 D50 D62
    Date: 2022–03

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