nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒09‒05
eleven papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. On the Distributional Robustness of Finite Rational Inattention Models By Emerson Melo
  2. Bayesian Persuasion: Reduced Form Approach By Juuso Toikka; Akhil Vohra; Rakesh Vohra
  3. Gacha Game: When Prospect Theory Meets Optimal Pricing By Tan Gan
  4. Private Information Acquisition and Preemption: a Strategic Wald Problem By Guo Bai
  5. Costly Evidence and Discretionary Disclosure By Mark Whitmeyer; Kun Zhang
  6. Persuading Risk-Conscious Agents: A Geometric Approach By Jerry Anunrojwong; Krishnamurthy Iyer; David Lingenbrink
  7. A Rationale for the “Meeting Competition Defense” when Competitive Pressure Varies Across Markets By Aguirre, Iñaki; Yenipazarli, Arda
  8. Confirmation Bias in Social Networks By Marcos Fernandes
  9. Learning to Sell a Focal-ancillary Combination By Hanzhao Wang; Xiaocheng Li; Kalyan Talluri
  10. The tragedy of the common holdings: Coordination strategies and product market competition By Neus, Werner; Stadler, Manfred
  11. Cooperation, competition, and welfare in a matching market By Bester, Helmut; Sákovics, József

  1. By: Emerson Melo
    Abstract: In this paper we study a rational inattention model in environments where the decision maker faces uncertainty about the true prior distribution over states. The decision maker seeks to select a stochastic choice rule over a finite set of alternatives that is robust to prior ambiguity. We fully characterize the distributional robustness of the rational inattention model in terms of a tractable concave program. We establish necessary and sufficient conditions to construct robust consideration sets. Finally, we quantify the impact of prior uncertainty, by introducing the notion of \emph{Worst-Case Sensitivity}.
    Date: 2022–08
  2. By: Juuso Toikka (University of Pennsylvania); Akhil Vohra (University of Cambridge); Rakesh Vohra (University of Pennsylvania)
    Abstract: We introduce reduced form representations of Bayesian persuasion problems where the variables are the probabilities that the receiver takes each of her actions. These are simpler objects than, say, the joint distribution over states and actions in the obedience formulation of the persuasion problem. This can make a difference in computational and analytical tractability which we illustrate with two applications. The first shows that with quadratic receiver payoffs, the worst-case complexity scales with the number of actions and not the number of states. If |A |and |S | denote the number of actions and states respectively, the worst case complexity of the obedience formulation is O(|A |2.5 max{|A |2.5,|S |2.5}). The worst case complexity of the reduced form representation is O(|A |3). In the second application, the reduced form leads to a simple greedy algorithm to determine the maximum value a sender can achieve in any cheap talk equilibrium.
    Keywords: Bayesian Persuasion, Information Design, Mechanism Design, Duality
    JEL: C6 D82 D83
    Date: 2022–06–28
  3. By: Tan Gan
    Abstract: This paper studies the pricing problem of selling a unit good to a prospect theory buyer. With non-negative constraints on the price, the optimal profit is always bounded. This suggests a distinction between random pricing and gambling, where the principal can extract infinite profit. If the buyer is naive about her dynamic inconsistency, the uniquely optimal dynamic mechanism is to sell a "loot box" that delivers the good with some constant probability in each period. Until she finally gets the good, the consumer always naively believes she will "try her luck" just one last time. In contrast, if the buyer is sophisticated, the uniquely optimal dynamic mechanism includes a "pity system", in which after successive failures in getting the good from all previous loot boxes, the buyer can purchase the good at full price.
    Date: 2022–08
  4. By: Guo Bai
    Abstract: This paper studies a dynamic information acquisition model with payoff externalities. Two players can acquire costly information about an unknown state before taking a safe or risky action. Both information and the action taken are private. The first player to take the risky action has an advantage but whether the risky action is profitable depends on the state. The players face the tradeoff between being first and being right. In equilibrium, for different priors, there exist three kinds of randomisation: when the players are pessimistic, they enter the competition randomly; when the players are less pessimistic, they acquire information and then randomly stop; when the players are relatively optimistic, they randomly take an action without acquiring information.
    Date: 2022–07
  5. By: Mark Whitmeyer; Kun Zhang
    Abstract: A sender flexibly acquires evidence--which she may pay a third party to certify--to disclose to a receiver. When evidence acquisition is overt, the receiver observes the evidence gathering process irrespective of whether its outcome is certified. When acquisition is covert, the receiver does not. In contrast to the case with exogenous evidence, the receiver prefers a strictly positive certification cost. As acquisition costs vanish, equilibria converge to the Pareto-worst free-learning equilibrium. The receiver always prefers covert to overt evidence acquisition.
    Date: 2022–08
  6. By: Jerry Anunrojwong; Krishnamurthy Iyer; David Lingenbrink
    Abstract: We consider a persuasion problem between a sender and a receiver whose utility may be nonlinear in her belief; we call such receivers risk-conscious. Such utility models arise when the receiver exhibits systematic biases away from expected-utility-maximization, such as uncertainty aversion (e.g., from sensitivity to the variance of the waiting time for a service). Due to this nonlinearity, the standard approach to finding the optimal persuasion mechanism using revelation principle fails. To overcome this difficulty, we use the underlying geometry of the problem to develop a convex optimization framework to find the optimal persuasion mechanism. We define the notion of full persuasion and use our framework to characterize conditions under which full persuasion can be achieved. We use our approach to study binary persuasion, where the receiver has two actions and the sender strictly prefers one of them at every state. Under a convexity assumption, we show that the binary persuasion problem reduces to a linear program, and establish a canonical set of signals where each signal either reveals the state or induces in the receiver uncertainty between two states. Finally, we discuss the broader applicability of our methods to more general contexts, and illustrate our methodology by studying information sharing of waiting times in service systems.
    Date: 2022–08
  7. By: Aguirre, Iñaki; Yenipazarli, Arda
    Abstract: This paper analyzes the economic implications of oligopoly price discrimination when competition pressure varies across markets. We find that a necessary condition for price discrimination to enhance social welfare is satisfied when the number of firms is higher in the strong market compared to the weak market. We also investigate certain economic implications of the Robinson-Patman Act (RPA) associated with “meeting competition defense” (MCD). Using equilibrium models, we find a basic rationale for the MCD: in cases of primary-line injury, when competitive pressure is more pronounced in the strong market relative to the weak market, the use of MCD might allow price discrimination to enhance welfare by boosting consumer surplus in the weak market. This result holds true regardless of whether price discrimination occurs in the final good market or intermediate good market, and it is robust to the nature of competition. We also unravel that these results change drastically under secondary-line injury.
    Keywords: third-degree price discrimination, Robinson-Patman Act, meeting competition defense, oligopoly, welfare.
    JEL: D43 D61 L13 L41
    Date: 2022–07–12
  8. By: Marcos Fernandes
    Abstract: I propose a theoretical social learning model to investigate how confirmation bias affects opinions when agents exchange information over a social network. For that, besides exchanging opinions with friends, individuals observe a public sequence of potentially ambiguous signals and they interpret it according to a rule that accounts for confirmation bias. I first show that, regardless the level of ambiguity and both in the case of a single individual or of a networked society, only two types of opinions might be formed and both are biased. One opinion type, however, is necessarily less biased than the other depending on the state of the world. The size of both biases depends on the ambiguity level and the relative magnitude of the state and confirmation biases. In this context, long-run learning is not attained even when individuals interpret ambiguity impartially. Finally, since it is not trivial to ascertain analytically the probability of emergence of the less biased consensus when individuals are connected through a social network and have different priors, I use simulations to analyze its determinants. Three main results derived from this exercise are that, in expected terms, i) some network topologies are more conducive to consensus efficiency, ii) some degree of partisanship enhances consensus efficiency even under confirmation bias and iii) open-mindedness, i.e. when partisans agree to exchange opinions with other partisans with polar opposite beliefs, might harm efficiency in some cases.
    Date: 2022–07
  9. By: Hanzhao Wang; Xiaocheng Li; Kalyan Talluri
    Abstract: A number of products are sold in the following sequence: First a focal product is shown, and if the customer purchases, one or more ancillary products are displayed for purchase. A prominent example is the sale of an airline ticket, where first the flight is shown, and when chosen, a number of ancillaries such as cabin or hold bag options, seat selection, insurance etc. are presented. The firm has to decide on a sale format -- whether to sell them in sequence unbundled, or together as a bundle -- and how to price the focal and ancillary products, separately or as a bundle. Since the ancillary is considered by the customer only after the purchase of the focal product, the sale strategy chosen by the firm creates an information and learning dependency between the products: for instance, offering only a bundle would preclude learning customers' valuation for the focal and ancillary products individually. In this paper we study learning strategies for such focal and ancillary item combinations under the following scenarios: (a) pure unbundling to all customers, (b) personalized mechanism, where, depending on some observed features of the customers, the two products are presented and priced as a bundle or in sequence, (c) initially unbundling (for all customers), and switch to bundling (if more profitable) permanently once during the horizon. We design pricing and decisions algorithms for all three scenarios, with regret upper bounded by $O(d \sqrt{T} \log T)$, and an optimal switching time for the third scenario.
    Date: 2022–07
  10. By: Neus, Werner; Stadler, Manfred
    Abstract: We study quantity and price competition in heterogeneous triopoly markets where two firms are commonly owned by institutional shareholders, whereas the third firm is owned by independent shareholders. With such a mixed ownership structure, the common owners have an incentive to coordinate their firms' behavior. If direct coordination of the operational decisions is prevented by antitrust authorities, delegation to managers enables indirect coordination via the designs of the manager compensation contracts. Compared to direct owner collusion, this more sophisticated type of indirect collusion leads to a lower loss of social welfare in the mode of quantity competition, but to a higher loss of welfare in the mode of price competition. In general, owner coordination via the management compensation contracts is detrimental to welfare: the tragedy of common holdings.
    Keywords: Manager compensation,common holdings,shareholder coordination
    JEL: G32 L22 M52
    Date: 2022
  11. By: Bester, Helmut; Sákovics, József
    Abstract: We investigate the welfare effect of increasing competition in an anonymous two-sided matching market, where matched pairs play an infinitely repeated Prisoner's Dilemma. Higher matching efficiency is usually considered detrimental as it creates stronger incentives for defection. We point out, however, that a reduction in matching frictions also increases welfare because more agents find themselves in a cooperative relationship. We characterize the conditions for which increasing competition increases overall welfare. In particular, this is always the case when the incentives for defection are high.
    Keywords: Cooperation,Prisoner's Dilemma,Competition,Welfare,Matching,Trust Building
    JEL: C72 C73 C78 D6
    Date: 2022

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