nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒06‒20
twenty-two papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Network Externalities, Dominant Value Margins, and Equilibrium Uniqueness By Jay Pil Choi; Christodoulos Stefanadis
  2. Efficient Incentives with Social Preferences By Daske, Thomas; March, Christoph
  3. Optimal screening contests By Sumit Goel
  4. Third-Party Sale of Information By Evans, R., Park, I-U.; Park, I-U.
  5. Overcoming Free-Riding in Bandit Games By Johannes Hörner; Nicolas Klein; Sven Rady
  6. Credible Persuasion By Xiao Lin; Ce Liu
  7. Tying under Double-Marginalization By Inderst, Roman; Griem, Fabian; Schaffer, Greg
  8. Overwhelmed by Routine Tasks: A Multi-Tasking Principle Agent Perspective By Dominique Demougin; Carsten Helm
  9. Private Information and Optimal Infant Industry Protection By B. Ravikumar; Raymond Riezman; Yuzhe Zhang
  10. Optimal preference satisfaction for conflict-free joint decisions By Hiroaki Shinkawa; Nicolas Chauvet; Guillaume Bachelier; Andr\'e R\"ohm; Ryoichi Horisaki; Makoto Naruse
  11. Intertemporal Choice with Continuity Constraints By Marcus Pivato
  12. Strategic Behavior under Context Misalignment By Pierfrancesco Guarino; Gabriel Ziegler
  13. Pricing with algorithms By Rohit Lamba; Sergey Zhuk
  14. Robust Contracts in Common Agency By Keeler Marku; Sergio Ocampo; Jean-Baptiste Tondji
  15. The 'Invisible Hand' of Vote Markets By Dimitrios Xefteris; Nicholas Ziros
  16. Efficient Entry in Cournot (Global) games By Harrison, Rodrigo; Jara-Moroni, Pedro
  17. Voluntary Disclosure and Personalized Pricing By Nageeb Ali, S.; Lewis, Greg; Vasserman, Shoshana
  18. Endogenous stackelberg leadership: the symmetric case By Jara-Moroni, Pedro
  19. Market dynamics with a state-owned dominant firm and a competitive fringe By Domenico Colucci; Nicola Doni; Giorgio Ricchiuti; Vincenzo Valori
  20. Status Quo Property Protection in Politico-Legal Systems By Roger Lagunoff
  21. Coordinated Strategic Manipulations and Mechanisms in School Choice By Ryo Shirakawa
  22. Advantageous selection without moral hazard (with an application to life care annuities) By De Donder, Philippe; Leroux, Marie-Louise; Salanié, François

  1. By: Jay Pil Choi; Christodoulos Stefanadis
    Abstract: We examine tippy network markets that accommodate price discrimination. The analysis shows that when a mild equilibrium refinement, the monotonicity criterion, is adopted, network competition may have a unique subgame-perfect equilibrium regarding the winner’s identity; the prevailing brand may be fully determined by its product features. We bring out the concept of the dominant value margin, which is a metric of the effectiveness of divide-and-conquer strategies. The supplier with the larger dominant value margin may always sell to all customers in equilibrium. Such a market outcome is not always socially efficient since a socially inferior supplier may prevail if has a stand-alone-benefit advantage and only a modest network-benefit disadvantage.
    Keywords: network externalities, equilibrium uniqueness, price discrimination, monotonicity criterion, dominant value margin, divide and conquer
    JEL: L13 L40 D43
    Date: 2022
  2. By: Daske, Thomas; March, Christoph
    Abstract: This study explores mechanism design with allocation-based social preferences. Agents' social preferences and private payoffs are all subject to asymmetric information. We assume quasi-linear utility and independent types. We show that the asymmetry of information about agents' social preferences can be operationalized to satisfy agents' participation constraints. Our main result is a possibility result for groups of at least three agents: If endowments are sufficiently large, any such group can resolve any given allocation problem with an ex-post budget-balanced mechanism that is Bayesian incentive-compatible, interim individually rational, and ex-post Pareto-efficient.
    Keywords: mechanism design,social preferences,Bayesian implementation,participation constraints
    JEL: C72 C78 D62 D82
    Date: 2022
  3. By: Sumit Goel
    Abstract: We study the optimal design of contests as screening devices. In an incomplete information environment, contest results reveal information about the quality of the participating agents at the cost of potentially wasteful effort put in by these agents. We are interested in finding contests that maximize the information revealed per unit of expected effort put in by the agents. In a model with linear costs of effort and privately known marginal costs, we find the Bayes-Nash equilibrium strategy for arbitrary prize structures ($1=v_1 \geq v_2 \dots \geq v_n=0$) and show that the equilibrium strategy mapping marginal costs to effort is always a density function. It follows then that the expected effort under the uniform prior on marginal costs is independent of the prize structure. Restricting attention to a simple class of uniform prizes contests (top $k$ agents get $1$ and others get $0$), we find that the optimal screening contest under the uniform prior awards half as many prizes as there are agents. For the power distribution $F(\theta)=\theta^p$ with $p\geq 1$, we conjecture that the number of prizes in the optimal screening contest is decreasing in $p$. In addition, we also show that a uniform prize structure is generally optimal for the standard objectives of maximizing expected effort of an arbitrary agent, most efficient agent and least efficient agent.
    Date: 2022–05
  4. By: Evans, R., Park, I-U.; Park, I-U.
    Abstract: We study design and pricing of information by a monopoly information provider for a buyer in a trading relationship with a seller. The profit-maximizing information structure has a binary threshold character. This structure is inefficient when seller production cost is low. Compared with a situation of no information, the information provider increases welfare if cost is high but reduces it if cost is low. A monopoly provider creates higher welfare than a competitive market in information if the prior distribution of buyer valuations is not too concentrated. Giving the seller a veto over the information contract generates full efficiency.
    Keywords: Information Sale, Mechanism Design, Information Design
    JEL: D42 D61 D82 D83 L12 L15
    Date: 2022–05–18
  5. By: Johannes Hörner (Yale University [New Haven], TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique); Nicolas Klein (UdeM - Université de Montréal); Sven Rady (Department of Mathematics - University of Bonn - Rheinische Friedrich-Wilhelms-Universität Bonn)
    Abstract: This paper considers a class of experimentation games with L´evy bandits encompassing those of Bolton and Harris (1999) and Keller, Rady and Cripps (2005). Its main result is that efficient (perfect Bayesian) equilibria exist whenever players' payoffs have a diffusion component. Hence, the trade-offs emphasized in the literature do not rely on the intrinsic nature of bandit models but on the commonly adopted solution concept (MPE). This is not an artifact of continuous time: we prove that such equilibria arise as limits of equilibria in the discretetime game. Furthermore, it suffices to relax the solution concept to strongly symmetric equilibrium.
    Keywords: Two-Armed Bandit,Bayesian Learning,Strategic Experimentation,Strongly Symmetric Equilibrium.
    Date: 2021–04–01
  6. By: Xiao Lin; Ce Liu
    Abstract: We propose a new notion of credibility for Bayesian persuasion problems. A disclosure policy is credible if the sender cannot profit from tampering with her messages while keeping the message distribution unchanged. We show that the credibility of a disclosure policy is equivalent to a cyclical monotonicity condition on its induced distribution over states and actions. We also characterize how credibility restricts the Sender's ability to persuade under different payoff structures. In particular, when the sender's payoff is state-independent, all disclosure policies are credible. We apply our results to the market for lemons, and show that no useful information can be credibly disclosed by the seller, even though a seller who can commit to her disclosure policy would perfectly reveal her private information to maximize profit.
    Date: 2022–05
  7. By: Inderst, Roman; Griem, Fabian; Schaffer, Greg
    Abstract: In a model of contractual inefficiencies due to double-marginalization, we analyze the practice of tied rebates that incentivizes retailers to purchase multiple products from the same manufacturer. We isolate two opposing effects: a surplus-sharing effect that enhances efficiency and a rent-extraction effect that reduces efficiency. The overall effect is more likely to be negative when the manufacturer has a particularly strong brand for which the retailers alternatives are much inferior. Foreclosure of a more efficient provider of the manufacturers weaker product is not a sufficient condition for a welfare loss. Our key positive implication relates to the seemingly inefficient introduction of weaker products by the owners of particularly strong brands.
    Keywords: contractual inefficiencies,double-marginalization,competition,surplus-sharing effect,rent-extraction effect,efficiency,brand strength
    JEL: L14 D43
    Date: 2022
  8. By: Dominique Demougin; Carsten Helm
    Abstract: We analyze a multitasking model with a verifiable routine task and a skill-dependent activity characterized by moral hazard. Contracts negotiated by firm/employee pairs follow from Nash bargaining. High- and low-skilled employees specialize, intermediate productivity employees perform both tasks. Compared to the efficient solution, more employees exert both tasks and effort in the routine task is inefficiently large. As work overload in the routine task is decoupled from a corresponding increase in remuneration, employees perceive a loss of control to allocate effort between the two tasks. Reductions in employees’ bargaining power and improvements in monitoring technologies aggravate the issue.
    Keywords: multi-tasking, work overload, routine tasks, rent extraction, moral hazard, limited liability, Nash Bargaining
    JEL: D82 D86 J41 M52
    Date: 2022
  9. By: B. Ravikumar; Raymond Riezman; Yuzhe Zhang
    Abstract: We study infant industry protection using a dynamic model in which the industry's cost is initially higher than that of foreign competitors. The industry can stochastically lower its cost via learning by doing. Whether the industry has transitioned to low cost is private information. We use a mechanism-design approach to induce the industry to reveal its true cost. We show that (i) the optimal protection, measured by infant industry output, declines over time and is less than that under public information, (ii) the optimal protection policy is time consistent under public information but not under private information, (iii) the optimal protection policy can be implemented with minimal information requirements, and (iv) a government with a limited budget can use a simple approach to choose which industries to protect.
    Keywords: Protection; Infant Industry; Private Information; Mechanism Design; Time Consistency
    JEL: D82 F10 F13 O25
    Date: 2022–05–20
  10. By: Hiroaki Shinkawa; Nicolas Chauvet; Guillaume Bachelier; Andr\'e R\"ohm; Ryoichi Horisaki; Makoto Naruse
    Abstract: We all have preferences when multiple choices are available. If we insist on satisfying our preferences only, we may suffer a loss due to conflicts with other people's identical selections. Such a case applies when the choice cannot be divided into multiple pieces due to the intrinsic nature of the resources. Former studies, such as the top trading cycle, examined how to conduct fair joint decision-making while avoiding decision conflicts from the perspective of game theory when multiple players have their own deterministic preference profiles. However, in reality, probabilistic preferences can naturally appear in relation to the stochastic decision-making of humans. Here, we theoretically derive conflict-free joint decision-making that can satisfy the probabilistic preferences of all individual players. More specifically, we mathematically prove the conditions wherein the deviation of the resultant chance of obtaining each choice from the individual preference profile, which we call the loss, becomes zero, meaning that all players' satisfaction is perfectly appreciated while avoiding decision conflicts. Furthermore, even in situations where zero-loss conflict-free joint decision-making is unachievable, we show how to derive joint decision-making that accomplishes the theoretical minimum loss while ensuring conflict-free choices. Numerical demonstrations are also shown with several benchmarks.
    Date: 2022–05
  11. By: Marcus Pivato (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)
    Abstract: We consider a model of intertemporal choice where time is a continuum, the set of instantaneous outcomes (e.g., consumption bundles) is a topological space, and intertemporal plans (e.g., consumption streams) must be continuous functions of time. We assume that the agent can form preferences over plans defined on open time intervals. We axiomatically characterize the intertemporal preferences that admit a representation via discounted utility integrals. In this representation, the utility function is continuous and unique up to positive affine transformations, and the discount structure is represented by a unique Riemann–Stieltjes integral plus a unique linear functional measuring the long-run asymptotic utility.
    Keywords: Intertemporal choice,intergenerational social choice,technological feasibility,continuous utility,Stone-Čech compactification.
    Date: 2021–03–11
  12. By: Pierfrancesco Guarino; Gabriel Ziegler
    Abstract: We study the behavioral implications of Rationality and Common Strong Belief in Rationality (RCSBR) with contextual assumptions allowing players to entertain misaligned beliefs, i.e., players can hold beliefs concerning their opponents' beliefs where there is no opponent holding those very beliefs. Taking the analysts' perspective, we distinguish the infinite hierarchies of beliefs actually held by players ("real types") from those that are a byproduct of players' hierarchies ("imaginary types") by introducing the notion of separating type structure. We characterize the behavioral implications of RCSBR for the real types across all separating type structures via a family of subsets of Full Strong Best-Reply Sets of Battigalli & Friedenberg (2012). By allowing misalignment, in dynamic games we can obtain behavioral predictions inconsistent with RCSBR (in the standard framework), contrary to the case of belief-based analyses for static games--a difference due to the dichotomy "non-monotonic vs. monotonic" reasoning.
    Date: 2022–05
  13. By: Rohit Lamba; Sergey Zhuk
    Abstract: This paper studies Markov perfect equilibria in a repeated duopoly model where sellers choose algorithms. An algorithm is a mapping from the competitor's price to own price. Once set, algorithms respond quickly. Customers arrive randomly and so do opportunities to revise the algorithm. In the simple game with two possible prices, monopoly outcome is the unique equilibrium for standard functional forms of the profit function. More generally, with multiple prices, exercise of market power is the rule -- in all equilibria, the expected payoff of both sellers is above the competitive outcome, and that of at least one seller is close to or above the monopoly outcome. Sustenance of such collusion seems outside the scope of standard antitrust laws for it does not involve any direct communication.
    Date: 2022–05
  14. By: Keeler Marku; Sergio Ocampo (University of Western Ontario); Jean-Baptiste Tondji (University of Texas Rio Grande Valley)
    Abstract: We consider a game between several principals and a common agent, where principals know only a subset of the agent’s available actions. Principals demand robustness and evaluate contracts on a worst-case basis. This robust approach allows for a crisp characterization of the equilibrium contracts and payoffs and provides a novel proof of equilibrium existence in common agency by constructing a pseudo-potential for the game. Robust contracts make explicit how the efficiency of the equilibrium outcome relative to collusion among principals depends on the principals’ ability to extract payments from the agent.
    Keywords: Common Agency, Robustness, Worst Case, Efficiency
    JEL: C72 D81 D86 H21
    Date: 2022
  15. By: Dimitrios Xefteris; Nicholas Ziros
    Abstract: This paper studies electoral competition between two non-ideological parties when voters are free to trade votes for money. We find that allowing for vote trading has significant policy consequences, even if trade does not actually take place in equilibrium. In particular, the parties' equilibrium platforms are found to converge (hence, there is no reason for vote trading) to the ideal policy of the mid-range voter, instead of converging to the peak of the median voter (as they do when vote trading is forbidden). That is, a market for votes may not change the outcome only by redistributing the political power among voters when the parties' policy proposals are fixed (e.g., Casella, Llorente-Saguer, and Palfrey, 2012, etc.), but also by acting as an invisible hand - modifying parties' incentives when platform choice is endogenous.
    Keywords: Electoral competition; invisible hand; vote markets; mid-range voter; Downsian model
    JEL: D72
    Date: 2022–05–27
  16. By: Harrison, Rodrigo; Jara-Moroni, Pedro (Universidad de Santiago de Chile. Departamento de Economía; Universidad Adolfo Ibáñez. Facultad de Ingeniería y Ciencias)
    Abstract: IWe present a two stage entry game in which a large number of firms choose simultaneouslywhether to enter a market or not. Firms that decide to enter the market produce a homogeneousgood facing Cournot competition under a parametrized demand. Using a global game approach, weshow that there exist selection of a unique equilibrium in the first stage entry game, in which thereis efficient entry, i.e. firms that enter are the ones with the lowest entry cost, providing theoreticalfoundation for the equilibrium selection assumption utilized in entry models in the empirical entryliterature. We explore as well efficiency properties of the selected equilibrium and provide examplesthat do not fit our general framework, but where similar results may be obtained.
    Keywords: Cournot, Global game, Equilibrium selection, Strategic substitutes
    JEL: L13 D82 C72
    Date: 2021–04
  17. By: Nageeb Ali, S. (Pennsylvania State University); Lewis, Greg (Microsoft Research); Vasserman, Shoshana (Stanford University Graduate School of Business and NBER)
    Abstract: Firms have ever increasing access to consumer data, which they use to personalize their advertising and to price discriminate. This raises privacy concerns. Policymakers have argued in response that consumers should be given control over their data, able to choose what to share and when. Since firms learn about a consumer’s preferences both from what they do and do not disclose, the equilibrium implications of consumer control are unclear. We study whether such measures improve consumer welfare in monopolistic and in competitive markets. We find that consumer control can improve consumer welfare relative to both perfect price discrimination and uniform pricing. First, consumers can use disclosure to amplify competitive forces. Second, consumers can disclose information to induce even a monopolist to lower prices. Whether consumer control improves welfare depends on the disclosure technology and market competitiveness. Simple disclosure technologies suffice in competitive markets. When facing a monopolist, a consumer needs partial disclosure possibilities to obtain any welfare gains.
    JEL: D4 D8
    Date: 2022–04
  18. By: Jara-Moroni, Pedro (Universidad de Santiago de Chile. Departamento de Economía)
    Abstract: In this article we prove that, when firms are identical, there are no non-degenerate mixed strategy equilibria in the linear quantity setting duopoly game studied by van Damme and Hurkens (1999) , in which firms engage in the “Action Commitment Game” proposed by Hamilton and Slutsky (1990). The consequence of this is that in the symmetric case, there can not be equilibrium selection through risk dominance in such game
    Keywords: Stackelberg, Cournot, Endogenous Timing, Mixed Strategies
    JEL: C72 D43
    Date: 2021–07
  19. By: Domenico Colucci; Nicola Doni; Giorgio Ricchiuti; Vincenzo Valori
    Abstract: We analyze the market dynamics in a model in which one dominant firm and a large number of small, not fully rational firms coexist. The dominant firm announces a reference price, but the market price can diverge from such reference price: this is due to the dominant firm taking advantage of the bounded rationality of the fringe firms. In the baseline model, we find that the dominant firm has an incentive to announce a very low price and in the steady state the market price is usually higher than the reference price. In a more complex model, where a fraction of small firms employ an evolutionary mechanism to adjust their expectations, we find that the lower the reference price the higher the period-by-period fluctuations of the market prices. We show that both mean profits and their volatility are decreasing in the reference price and that the optimal choice is positively correlated with the degree of risk aversion of the dominant firm. In general, socially preferable outcomes can be achieved when the dominant firm behaves as strongly risk averse. We draw some policy implications from this conclusion.
    Keywords: market dynamics, competitive fringe, dominant firm, switching mechanism
    JEL: D21 D25 D84 D91
    Date: 2022
  20. By: Roger Lagunoff (Department of Economics, Georgetown University)
    Abstract: This paper models status quo (SQ) protection of property rights. A politico-legal system determines eligibility of citizen-groups for protection. A ruling authority can reallocate property iff reallocation is preferable to the status quo for one such group. Along the solution path, SQ protections distort allocations across different assets and across different property owners. Asset distortions vanish in the limit as the path converges to a stationary assignment. Ownership distortions vanish in the limit if there are no individuals who belong to every eligible group. If the authority is self-interested, then systemic protection of vulnerable groups may be welfare improving.
    Keywords: Dynamic Status Quo Protections, Politico-legal system, Veto Set, Systemic protection
    JEL: C73 D72 H13 H41 P5
  21. By: Ryo Shirakawa (Graduate School of Economics, The Univerity of Tokyo and Junior Research Fellow, Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN)
    Abstract: This study observes that no group strategy-proof mechanism satisfies even a fairly weak notion of stability in a school choice setting. In response to this result, we introduce two monotonicity axioms, which we call top-dropping monotonicity and extension monotonicity, as alternatives to group strategy-proofness. We prove that these two axioms are equivalent to the requirement that no group of students gains from a simple manipulation of their preferences. Replacing group strategy-proofness with the two axioms, we find that the Kesten's (2010) efficiency adjusted deferred acceptance mechanism is the unique mechanism satisfying the three criteria. We also provide several applications of the two monotonicity axioms, finding axiomatic characterizations of the deferred acceptance mechanism and a class of mechanisms in which stability and strategy-proofness are equivalent.
    Keywords: Matching; School choice; Strategy-proofness; Group strategy-proofness; Monotonicity; Deferred acceptance; Efficiency adjusted deferred acceptance
    JEL: C78 D47
    Date: 2022–06
  22. By: De Donder, Philippe; Leroux, Marie-Louise; Salanié, François
    Abstract: Advantageous (or propitious) selection occurs when an increase in the premium of an in- surance contract induces high-cost agents to quit, thereby reducing the average cost among remaining buyers. Hemenway (1990) and many subsequent contributions motivate its ad- vent by differences in risk-aversion among agents, implying different prevention efforts. We argue that it may also appear in the absence of moral hazard, when agents only differ in riskiness and not in (risk) preferences. We first show that profit-maximization implies that advantageous selection is more likely when markup rates and the elasticity of insurance demand are high. We then move to standard settings satisfying the single-crossing prop- erty and show that advantageous selection may occur when several contracts are offered, when agents also face a non-insurable background risk, or when agents face two mutually exclusive risks that are bundled together in a single insurance contract. We exemplify this last case with life care annuities, a product which bundles long-term care insurance and annuities, and we use Canadian survey data to provide an example of a contract facing advantageous selection.
    Keywords: Propitious selection; Positive or negative correlation property; Contract bundling; Long-term care insurance; Annuity
    JEL: D82 I13
    Date: 2022–05–17

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