nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒10‒17
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Cursed Consumers and the Effectiveness of Consumer Protection Policies By Ispano, Alessandro; Schwardmann, Peter
  2. Efficient Full Implementation via Transfers: Uniqueness and Sensitivity in Symmetric Environments By Mariann Ollár; Antonio Penta
  3. Information vs Competition: How Platform Design Affects Profits and Surplus By Amedeo Piolatto; Florian Schuett
  4. Platform Liability and Innovation By Doh-Shin Jeon; Yassine Lefouili; Leonardo Madio
  5. Competition with limited attention to quality differences By Schmitt, Stefanie Y.
  6. Ambiguous Cheap Talk By Longjian Li
  7. Optimal Non-Linear Pricing with Data-Sensitive Consumers By Krähmer, Daniel; Strausz, Roland
  8. Attitudes Towards Success and Failure By Larbi Alaoui; Antonio Penta
  9. Market Effects of Sponsored Search Auctions By Massimo Motta; Antonio Penta
  10. Mutual knowledge of rationality and correct beliefs in $n$-person games: An impossibility theorem By Mehmet S. Ismail
  11. Price-Directed Search, Product Differentiation and Competition By Martin Obradovits; Philipp Plaickner
  12. Preference Restrictions for Simple and Strategy-Proof Rules: Local and Weakly Single-Peaked Domains By Agustín G Bonifacio; Jordi Massó; Pablo Neme
  13. Cycling and Categorical Learning in Decentralized Adverse Selection Economies By Philippe Jehiel; Erik Mohlin
  14. The optimality of (stochastic) veto delegation By Xiaoxiao Hu; Haoran Lei
  15. Equity-efficiency trade-off in quasi-linear environments By Piotr Dworczak
  16. Gaussian Agency problems with memory and Linear Contracts By Villeneuve, Stéphane; Abi Jaber, Eduardo
  17. The Analogical Foundations of Cooperation By Philippe Jehiel; Larry Samuelson
  18. Backward Induction Reasoning beyond Backward Induction By Emiliano Catonini; Antonio Penta
  19. Vertical Control Change and Platform Organization under Network Externalities By Jorge Padilla; Salvatore Piccolo; Shiva Shekhar
  20. (Not) Addressing Issues in Electoral Campaigns By Salvador Barberà; Anke Gerber

  1. By: Ispano, Alessandro (CY Cergy Paris Université, CNRS and THEMA); Schwardmann, Peter (LMU Munich)
    Abstract: We model firms’ quality disclosure and pricing in the presence of cursed consumers, who fail to be sufficiently skeptical about undisclosed quality. We show that cursed consumers are exploited in duopoly markets if firms are vertically differentiated, if there are few cursed consumers, and if average product quality is high. Three common consumer protection policies that work under monopoly, i.e. mandatory disclosure, third party disclosure and consumer education, may all increase exploitation and decrease welfare. Even where these policies improve overall welfare, they often lead to a reduction in consumer surplus. We show that our conclusions hold in extensions with endogenous quality choice and horizontal differentiation.
    Keywords: naive; cursed; disclosure; consumer protection; labeling; competition;
    JEL: C72 D03 D82 D83
    Date: 2021–12–01
  2. By: Mariann Ollár; Antonio Penta
    Abstract: We study efficient implementation via transfers in unique rationalizable strategies, in environments that are symmetric in two senses: first, agents display the same total level of preference interdependence; second, types are commonly known to be drawn from distributions with identical (but unknown) means. We characterize the conditions under which full efficient implementation is possible via direct mechanisms, as well as the transfer schemes which achieve it whenever possible. We discuss a further robustness property, robustness to mistaken play, and show that it uniquely selects the transfer scheme which induces an even redistribution of strategic externalities.
    Keywords: efficient implementation, full implementation, interdependent values, loading transfers, equal-externality transfers, Rationalizability, robustness, sensitivity analysis, strategic externalities, symmetric environments, uniqueness
    JEL: D62 D82 D83
    Date: 2022–01
  3. By: Amedeo Piolatto; Florian Schuett
    Abstract: We study the design of online platforms that aggregate information and facilitate transac tions. Two different designs can be observed in the market: revealing platforms that disclose the identity of transaction partners (e.g. Booking) and anonymous platforms that do not (e.g. Hotwire). To analyse the implications of this design choice for profits and surplus, we develop a model in which consumers differ in their location as well as their preferred product variety. Sellers offer their products for sale both directly (`offline') and indirectly via the platform (`online') but are unable to credibly disclose the product variety they offer when selling offline. The model gives rise to a novel trade-off associated with the anonymous platform design: offline, consumers observe location but not variety; online, they observe variety but not location. While the revealing design leads to more informed consumers and better matches, the anonymous design allows sellers to price discriminate and introduces competition between sellers whose markets would otherwise be segmented. We show that the comparison between the designs depends crucially on the relative importance of information about location vis-à-vis information about variety. For an intermediate range, the anonymous design outperforms the revealing design in terms of both profits and welfare.
    Keywords: anonymous information platforms, opaque products, horizontal competition, experience goods, mismatch costs
    JEL: D02 D21 D43 D61 D83 L11 L13 L15
    Date: 2022–03
  4. By: Doh-Shin Jeon (Toulouse School of Economics, University of Toulouse Capitole and CEPR); Yassine Lefouili (Toulouse School of Economics, University of Toulouse Capitole); Leonardo Madio (Department of economics and management †Marco Fanno†, University of Padova and CESifo)
    Abstract: We study a platformâs incentives to delist IP-infringing products and the effects of holding the platform liable for the presence of such products on innovation and consumer welfare. For a given number of buyers, platform liability increases innovation by reducing the competitive pressure faced by innovative products. However, there can be a misalignment of interests between innovators and buyers. Furthermore, platform liability can have unintended consequences, which overturn the intended effect on innovation. Platform liability tends to increase (decrease) innovation and consumer welfare when the elasticity of participation of innovators is high (low) and that of buyers is low (high).
    Keywords: platform, liability, intellectual property, innovation
    JEL: K40 K42 K13 L13 L22 L86
    Date: 2022–09
  5. By: Schmitt, Stefanie Y.
    Abstract: I analyze the implication of consumers' limited attention to quality differences on market outcomes and welfare. I model this limited attention to quality differences with a perception threshold: Consumers only perceive quality differences between goods that exceed the consumers' perception threshold. The model allows for two types of equilibria: equilibria with distinguishable and equilibria with indistinguishable qualities. I show that horizontal product differentiation, which gives firms market power, affects equilibrium selection. If firms are horizontally differentiated, firms produce goods with indistinguishable qualities. Then, limited attention harms consumers and benefits firms. In contrast, if firms are not horizontally differentiated, firms produce goods with distinguishable qualities. Then, limited attention has no effect on consumers' welfare or firms' profits.
    Keywords: Limited Attention,Perception Threshold,Product Differentiation,Product Quality
    JEL: D43 D91 L13
    Date: 2022
  6. By: Longjian Li
    Abstract: This paper explores how ambiguity affects communication. We consider a cheap talk model in which the receiver evaluates the sender's message with respect to its worst-case expected payoff generated by multiplier preferences. We characterize the receiver's optimal strategy and show that the receiver's posterior action is consistent with his ex-ante action. We find that in some situations, ambiguity improves communication by shifting the receiver's optimal action upwards, and these situations are not rare.
    Date: 2022–09
  7. By: Krähmer, Daniel (University of Bonn); Strausz, Roland (HU Berlin)
    Abstract: We introduce consumers with intrinsic privacy preferences into the monopolistic non-linear pricing model. Next to classical consumers, there is a share of data-sensitive consumers who incur a privacy cost if their purchase reveals information to the monopolist. The monopolist discriminates between privacy types using privacy mechanisms which consist of a direct mechanism and a privacy option, targeting, respectively, classical and data-sensitive consumers. We show that a privacy mechanism is optimal if privacy costs are large and that it yields classical consumers a higher utility than data-sensitive consumers with the same valuation. If, by contrast, privacy preferences are public information, data-sensitive consumers with a low valuation obtain a strictly higher utility than classical consumers. With public privacy preferences, data-sensitive consumers and the monopolist are better off, whereas classical consumers are worse off. Our results are relevant for policy measures that target the data-awareness of consumers, such as the European GDPR.
    Keywords: optimal non-linear pricing; privacy; monopolistic screening;
    Date: 2021–11–19
  8. By: Larbi Alaoui; Antonio Penta
    Abstract: Individuals often attach a special meaning to obtaining a certain goal, and getting past a threshold marks the difference between what they consider a success or a failure. In this paper we take a standard von Neumann-Morgenstern Expected Utility setting with an exogenous reference point that separates success from failure, and define attitudes towards success and failure as features of preferences over lotteries. The distinctive feature of our definitions is that they all concern a local reversal of the decision maker's risk attitude between riskaversion and risk-lovingness across the reference point. Our findings provide a unified view of several well-known models of reference-dependent preferences in economics, finance and psychology, and also include novel representations. Moreover, we introduce orderings over the primitive space of preferences to define different attitudes with which each attitudes can be displayed, and characterize them in terms of the representation, with indices analogous to the well-known Arrow-Pratt index of risk aversion. Our findings shed new light on frequently used notions of reference-dependent preferences, and suggest that new comparative statics analyses be conducted in these settings. Finally, we argue that our framework may prove useful to incorporate, within a standard economic model, behavioral manifestations of personality traits that have received increasing attention within the empirical economics literature.
    Keywords: expected utility, loss aversion, aspirations, Risk Aversion, reference-dependence
    JEL: D01 D81
    Date: 2022–03
  9. By: Massimo Motta; Antonio Penta
    Abstract: We investigate the market effects of brand search advertising, within a model where two firms simultaneously choose the price of their (differentiated) product and the bids for the advertising auction which is triggered by own and rival's brand keywords search; and where there exist sophisticated/attentive consumers (who look for any available information on their screen) and naive/inattentive consumers (who only look at the top link of their screen), both aware of either brand's characteristics and price. Relative to a benchmark where only organic search exists, in any symmetric equilibrium each firm wins its own brand auction, and advertising has detrimental effects on welfare: (i) the sponsored link crowds out the rival's organic link, thus reducing competition and choice, and leading to price increases; (ii) the payment of the rival's bid (may) raise marginal cost, also contributing to raise market prices. Under extreme asymmetry (there is an incumbent and an unknown new entrant), we do find that the market effect of brand bidding might be beneficial, if the search engine does not list the entrant's link in organic search, and the share of the sophisticated consumers in the economy is large enough for an equilibrium in which the entrant wins the advertising auction on the search for the incumbent's brand to exist.
    Keywords: digital advertising, auctions, oligopoly, search engines, brands, horizontal agreements
    JEL: D44 L13 L4
    Date: 2022–06
  10. By: Mehmet S. Ismail
    Abstract: There are two well-known sufficient conditions for Nash equilibrium: common knowledge of rationality, and common prior, which exogenously assumes a profile of beliefs that are correct. However, it is not known how players arrive at a common prior \textit{before} playing the original game. In this note, I assume, in addition to (objective and subjective) rationality, that players' beliefs \textit{will be} correct once the game is played, but a common prior is not assumed. I study whether and under what conditions players endogenously arrive at a common prior. The main finding is an impossibility theorem, which states that mutual knowledge of rationality and mutual knowledge of correct beliefs are not in general logically consistent in $n$-person games. However, the two assumptions are consistent in two-player zero-sum games.
    Date: 2022–09
  11. By: Martin Obradovits; Philipp Plaickner
    Abstract: Especially in many online markets, consumers can readily observe prices, but may need to further inspect products to assess their suitability. We study the effects of product differentiation and search costs on competition and market outcomes in a tractable model of price-directed consumer search. We find that (i) firms' equilibrium pricing always induces efficient search behavior, (ii) for relatively large product differentiation, welfare distortions still occur because some consumers (may) forgo consumption, and (iii) lower search costs lead to stochastically higher prices, increasing firms' expected profits and decreasing their frequency of sales. Consumer surplus often falls when search costs decrease.
    Keywords: Consumer Search, Price-Directed Search, Product Differentiation, Price Competition, Mixed-Strategy Pricing, Search Costs
    JEL: D43 D83 L13
    Date: 2022
  12. By: Agustín G Bonifacio; Jordi Massó; Pablo Neme
    Abstract: We show that if a rule is strategy-proof, unanimous, anonymous and tops-only, then the preferences in its domain have to be local and weakly single-peaked, relative to a family of partial orders obtained from the rule by confronting at most three alternatives with distinct levels of support. Moreover, if this domain is enlarged by adding a non local and weakly single-peaked preference, then the rule becomes manipulable. We finally show that local and weak single-peakedness constitutes a weakening of known and well-studied restricted domains of preferences.
    Keywords: single-peakedness, strategy-proofness, anonymity, unanimity, tops-onlyness
    JEL: D71
    Date: 2022–02
  13. By: Philippe Jehiel (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, UCL - University College of London [London]); Erik Mohlin (Lund University [Lund], Institute for Futures Studies)
    Abstract: We study learning in a decentralized pairwise adverse selection economy, where buyers have access to the quality of traded goods but not to the quality of nontraded goods. Buyers categorize ask prices in order to predict quality as a function of ask price. The categorization is endogenously determined so that outcomes that are observed more often are categorized more finely, and within each category beliefs reflect the empirical average. This leads buyers to have a very fine understanding of the relationship between qualities and ask prices for prices below the current market price, but only a coarse understanding above that price. We find that this induces a price cycle involving the Nash equilibrium price, and one or more higher prices.
    Keywords: Adverse selection,Bounded rationality,Categorization,Learning,Model misspeciÖcation,OTC markets Adverse selection,Model misspecification,OTC markets
    Date: 2022–07
  14. By: Xiaoxiao Hu; Haoran Lei
    Abstract: We (re-)examine the optimal delegation problem between a principal and an agent, assuming that the latter has state-independent preferences. In this setting, the widely-studied interval delegation fails to elicit the agent's private information. We show that we can restrict attention to stochastic veto mechanisms in searching for a principal's preferred mechanism. When the optimal veto mechanism is valuable, the principal approves all proposals below some threshold and the veto probability increases as the proposed option gets more extreme. Our result provides grounds for the veto delegation pervasive in various organizations.
    Date: 2022–08
  15. By: Piotr Dworczak (Northwestern University; Group for Research in Applied Economics (GRAPE))
    Abstract: I study a simple equity-efficiency problem: A designer allocates a fixed amount of money to a population of agents differing in privately observed marginal values for money. She can only screen agents by asking them to burn utility (through some socially wasteful activity). I show that giving a lump-sum payment is outperformed by a mechanism with utility burning when the agent with the lowest money-denominated cost of engaging in the wasteful activity has an expected value for money that exceeds the average value by more than a factor of two.
    JEL: C78 D47 D61 D63 D82
    Date: 2022
  16. By: Villeneuve, Stéphane; Abi Jaber, Eduardo
    Abstract: Can a principal still offer optimal dynamic contracts that are linear in end-of-period outcomes when the agent controls a process that exhibits memory? We provide a positive answer by considering a general Gaussian setting where the output dynamics are not necessarily semi-martingales or Markov processes. We introduce a rich class of principal-agent models that encompasses dynamic agency models with memory. From the mathematical point of view, we develop a methodology to deal with the possible non-Markovianity and non-semimartingality of the control problem, which can no longer be directly solved by means of the usual Hamilton-Jacobi-Bellman equation. Our main contribution is to show that, for one-dimensional models, this setting always allows for optimal linear contracts in end-of-period observable outcomes with a deterministic optimal level of effort. In higher dimension, we show that linear contracts are still optimal when the effort cost function is radial and we quantify the gap betweenlinear contracts and optimal contracts for more general quadratic costs of efforts.
    Keywords: Principal-Agent models; Continuous-time control problems
    Date: 2022–09–22
  17. By: Philippe Jehiel (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, UCL - University College of London [London]); Larry Samuelson (Yale University [New Haven])
    Abstract: We offer an approach to cooperation in repeated games of private monitoring in which players construct models of their opponents' behavior by observing the frequencies of play in a record of past plays of the game in which actions but not signals are recorded. Players construct models of their opponent's behavior by grouping the histories in the record into a relatively small number of analogy classes to which they attach probabilities of cooperation. The incomplete record and the limited number of analogy classes lead to misspecified models that provide the incentives to cooperate. We provide conditions for the existence of equilibria supporting cooperation and equilibria supporting high payoffs for some nontrivial analogy partitions.
    Keywords: Analogical reasoning,Cooperation,Prisoners' dilemma,Repeated game,Private monitoring Analogical reasoning,Private monitoring
    Date: 2022–07
  18. By: Emiliano Catonini; Antonio Penta
    Abstract: Backward Induction is a fundamental concept in game theory. As an algorithm, it can only be used to analyze a very narrow class of games, but its logic is also invoked, albeit informally, in several solution concepts for games with imperfect or incomplete information (Subgame Perfect Equilibrium, Sequential Equilibrium, etc.). Yet, the very meaning of ‘backward induction reasoning’ is not clear in these settings, and we lack a way to apply this simple and compelling idea to more general games. We remedy this by introducing a solution concept for games with imperfect and incomplete information, Backwards Rationalizability, that captures precisely the implications of backward induction reasoning. We show that Backwards Rationalizability satisfies several properties that are normally ascribed to backward induction reasoning, such as: (i) an incomplete-information extension of subgame consistency (continuation-game consistency); (ii) the possibility, in finite horizon games, of being computed via a tractable backwards procedure; (iii) the view of unexpected moves as mistakes; (iv) a characterization of the robust predictions of a ‘perfect equilibrium’ notion that introduces the backward induction logic and nothing more into equilibrium analysis. We also discuss a few applications, including a new version of peer-confirming equilibrium (Lipnowski and Sadler (2019)) that, thanks to the backward induction logic distilled by Backwards Rationalizability, restores in dynamic games the natural comparative statics the original concept only displays in static settings.
    Keywords: backward induction, backwards procedure, backwards rationalizability, Incomplete Information, interim perfect equilibrium, Rationalizability, robustness
    JEL: C72 C73 D82
    Date: 2022–02
  19. By: Jorge Padilla; Salvatore Piccolo; Shiva Shekhar
    Abstract: In this paper, we examine how the introduction of network externalities impact an open and vertically integrated platform’s post-merger contractual relationship with third-party sellers distributing through its marketplace. Regardless of whether the platform uses linear contracts or two-part tariffs, we find that, provided these contracts are public, the platform has no incentive to exclude its non-integrated rivals and that the latter’s market share rises as network effects gain importance. Vertical integration serves as a commitment device that open platforms can use to convince potential users (e.g., consumers and developers) that their ecosystem will be large and compelling. Interestingly, when the open platform competes with a closed rival, i.e., with a fully integrated ecosystem, it may find it profitable to subsidize independent third-party sellers to strategically steer demand away from the competing ecosystem. These results have novel managerial implications on the incentives of a platform to open up its ecosystem to third-party sellers, as well as for the regulation of vertical integration in the presence of network effect and when different platforms operate alternative business models.
    Keywords: open ecosystems, network externalities, platforms, vertical integration
    JEL: L22 L41 L51
    Date: 2022
  20. By: Salvador Barberà; Anke Gerber
    Abstract: Two candidates competing for election may raise some issues for debate during the electoral campaign, while avoiding others. We present a model in which the decision to introduce an issue, or to reply to the opponent’s position on one that she raised, may result in further additions to the list of topics that end up being discussed. Candidates’ strategic decisions are driven by their appraisal of their expected vote share at the end of the campaign. Our analysis appeals to a protocol-free equilibrium concept, and predicts the list of topics that will be touched upon by each candidate, and the order in which they might be addressed. We show that important phenomena observed during campaigns, like the convergence of the parties to address the same issues, or else their diverging choice on which ones to treat, or the relevance of issue ownership can be explained within our stark basic model.
    Keywords: electoral campaigns, issues, equilibrium sets of continuation, campaigns, issue convergence, issue divergence, issue ownership
    JEL: D72 P16
    Date: 2022–06

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