nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒12‒05
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. The Morality of Markets By Mathias Dewatripont; Jean Tirole
  2. Existence of an Equilibrium in Arrowian Markets for Consumption Externalities By Jean-Marc Bonnisseau; Elena L. del Mercato; Paolo Siconolfi
  3. Incentives in Three-Sided Markets By Jorge Arenas; Juan Pablo Torres-Martinez
  4. The Quran and the Sword By Auriol, Emmanuelle; Platteau, Jean-Philippe; Verdier, Thierry
  5. Correlation-Savvy Sellers By Strausz, Roland
  6. Monotonic Mechanisms for Selling Multiple Goods By Ran Ben Moshe; Sergiu Hart; Noam Nisan
  7. Rationalization of indecisive choice behavior by majoritarian ballots By Jos\'e Carlos R. Alcantud; Domenico Cantone; Alfio Giarlotta; Stephen Watson
  8. Observable Perfect Equilibrium By Sam Ganzfried
  9. Norms and the evolution of leaders’ followership By Cabrales, Antonio; Hauk, Esther
  10. Dynamic Screening with Verifiable Bankruptcy By Krähmer, Daniel; Strausz, Roland
  11. Learning by Convex Combination By Flores-Szwagrzak, Karol
  12. Welfare-Enhancing Taxation and Price Discrimination By Anna D'Annunzio; Antonio Russo
  13. Voter Polarization and Extremism By Eguia, Jon; Hu, Tai-Wei
  14. Content Licensing with Endogenous Homing By Lu, Qiuyu
  15. Endogenous Network Effects By Dewenter, Ralf; Löw, Franziska

  1. By: Mathias Dewatripont; Jean Tirole
    Abstract: Scholars and civil society have argued that competition erodes supplier morality by offering consumer choice: "If I don't do it, someone else will". This paper establishes a robust irrelevance result, whereby intense market competition does not crowd out consequentialist ethics; it thereby issues a strong warning against the wholesale moral condemnation of markets and procompetitive institutions. Intense competition, while not altering the behavior of protable suppliers, however may reduce the standards of highly ethical suppliers or non-profits, raising the potential need to protect the latter in the marketplace.
    Keywords: Competition, consequentialism, replacement effect, non-profits,corporate social responsability, strategic complementarities, race to the ethical bottom.
    Date: 2022–11
  2. 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 examples showing first that quasi-equilibria and 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
  3. By: Jorge Arenas; Juan Pablo Torres-Martinez
    Abstract: We study incentives in a class of three-sided matching problems in which the set of stable outcomes is non-empty and coincides with the core. If U, V, and W denote the sides of the market, it is assumed that agents in U have preferences defined on V, agents in V have preferences defined on W, and agents in W have lexicographic preferences defined on VxU. Although in this context there exists a stable mechanism that is strategy-proof for agents in U and V, no stable mechanism is strategy-proof for agents in W. This impossibility is related to the incompatibility between stability, one-sided strategy-proofness, and one-sided non-bossiness in two-sided markets. Also, unlike what happens in marriage markets, strong restrictions on preferences are needed to ensure that stability and one-sided strategy-proofness are compatible for every market side.
    Date: 2022–11
  4. By: Auriol, Emmanuelle; Platteau, Jean-Philippe; Verdier, Thierry
    Abstract: This paper elucidates the willingness of an autocrat to push through institutional reforms in a context where traditional author- ities represented by religious clerics are averse to them and where the military control the means of repression and can potentially stage a coup. We show that although the autocrat always wants to co-opt the military, this is not necessarily true of the clerics. Exclusive co-option of the military obtains where the loyalty of the autocrat’s army is strong while the organizational strength of religious movements is rather low. Radical institutional reforms can then be implemented. Empirically, the dominant regime in contem- porary Muslim countries is the regime of double co-option where the autocrat resorts to a double-edged tactic: pleasing the official clerics by slowing the pace of reforms, and ensuring the loyalty of the military so as to put down clerics-led rebellions.
    Keywords: Autocracy; Army; Instrumentalization of religion; Islam; Reforms
    JEL: D02 D72 N40 O57 P48 Z12
    Date: 2022–11–07
  5. By: Strausz, Roland (HU Berlin)
    Abstract: A multi-product monopolist sells sequentially to a buyer who privately learns his valuations. Using big data, the monopolist learns the intertemporal correlation of the buyer’s valuations. Perfect price discrimination is generally unattainable—even when the seller learns the correlation perfectly, has full commitment, and in the limit where the consumption good about which the buyer has ex ante private information becomes insignificant. This impossibility is due to informational externalities which re- quires information rents for the buyer’s later consumption. These rents induce upward and downward distortions, violating the generalized no distortion at the top principle of dynamic mechanism design.
    JEL: D82 L52
    Date: 2022–11–10
  6. By: Ran Ben Moshe; Sergiu Hart; Noam Nisan
    Abstract: Maximizing the revenue from selling two or more goods has been shown to require the use of $nonmonotonic$ mechanisms, where a higher-valuation buyer may pay less than a lower-valuation one. Here we show that the restriction to $monotonic$ mechanisms may not just lower the revenue, but may in fact yield only a $negligible$ $fraction$ of the maximal revenue; more precisely, the revenue from monotonic mechanisms is no more than k times the simple revenue obtainable by selling the goods separately, or bundled (where k is the number of goods), whereas the maximal revenue may be arbitrarily larger. We then study the class of monotonic mechanisms and its subclass of allocation-monotonic mechanisms, and obtain useful characterizations and revenue bounds.
    Date: 2022–10
  7. By: Jos\'e Carlos R. Alcantud; Domenico Cantone; Alfio Giarlotta; Stephen Watson
    Abstract: We describe a model that explains possibly indecisive choice behavior, that is, quasi-choices (choice correspondences that may be empty on some menus). The justification is here provided by a proportion of ballots, which are quasi-choices rationalizable by an arbitrary binary relation. We call a quasi-choice $s$-majoritarian if all options selected from a menu are endorsed by a share of ballots larger than $s$. We prove that all forms of majoritarianism are equivalent to a well-known behavioral property, namely Chernoff axiom. Then we focus on two paradigms of majoritarianism, whereby either a simple majority of ballots justifies a quasi-choice, or the endorsement by a single ballot suffices - a liberal justification. These benchmark explanations typically require a different minimum number of ballots. We determine the asymptotic minimum size of a liberal justification.
    Date: 2022–10
  8. By: Sam Ganzfried
    Abstract: While Nash equilibrium has emerged as the central game-theoretic solution concept, many important games contain several Nash equilibria and we must determine how to select between them in order to create real strategic agents. Several Nash equilibrium refinement concepts have been proposed and studied for sequential imperfect-information games, the most prominent being trembling-hand perfect equilibrium, quasi-perfect equilibrium, and recently one-sided quasi-perfect equilibrium. These concepts are robust to certain arbitrarily small mistakes, and are guaranteed to always exist; however, we argue that neither of these is the correct concept for developing strong agents in sequential games of imperfect information. We define a new equilibrium refinement concept for extensive-form games called observable perfect equilibrium in which the solution is robust over trembles in publicly-observable action probabilities (not necessarily over all action probabilities that may not be observable by opposing players). Observable perfect equilibrium correctly captures the assumption that the opponent is playing as rationally as possible given mistakes that have been observed (while previous solution concepts do not). We prove that observable perfect equilibrium is always guaranteed to exist, and demonstrate that it leads to a different solution than the prior extensive-form refinements in no-limit poker. We expect observable perfect equilibrium to be a useful equilibrium refinement concept for modeling many important imperfect-information games of interest in artificial intelligence.
    Date: 2022–10
  9. By: Cabrales, Antonio; Hauk, Esther
    Abstract: In this paper we model the interaction between leaders, their followers and crowd followers in a coordination game with local interaction. The steady states of a dynamic best-response process can feature a coexistence of Pareto dominant and risk dominant actions in the population. The existence of leaders and their followers, plus the local interaction, which leads to clustering, is crucial for the survival of the Pareto dominant actions. The evolution of leader and crowd followership shows that leader followership can also be locally stable around Pareto dominant leaders. The paper answers the questions (i) which Leader should be removed and (ii) how to optimally place leaders in the network to enhance payoff dominant play.
    Date: 2022–07–12
  10. By: Krähmer, Daniel (University of Bonn); Strausz, Roland (HU Berlin)
    Abstract: We consider a dynamic screening model where the agent may go bankrupt due to, for example, cash constraints. We model bankruptcy as a verifiable event that occurs whenever the agent makes a per period loss. This leads to less stringent truth-telling constraints than those considered in the existing literature. We show that the weaker constraints do not af- fect optimal contracting in private values settings but may do so with interdependent values. Moreover, we develop a novel method to study private values settings with continuous types and identify a new regularity condition that ensures that the optimal contract is deterministic.
    Keywords: dynamic screening; bankruptcy; verifiability; mean preserving spread;
    JEL: D82 H57
    Date: 2022–11–10
  11. By: Flores-Szwagrzak, Karol (Department of Economics, Copenhagen Business School)
    Abstract: We study how an agent evaluates the optimality of an action when she only observes a sample of its outcomes, not the outcome distribution. We characterize a model where the agent assigns an ex-ante utility to the action and then, upon seeing the sample, “updates” her evaluation by taking a convex combination of this ex-ante utility and the average utility of the outcomes in the sample. The weight on the average utility in this convex combination increases with sample size. Asymptotically, actions are evaluated using their sample average utility. The model includes Bayesian benchmarks as special cases. More generally, it describes an agent that may learn imperfectly yet consistently with a rough intuitive understanding of the Law of Large Numbers; it also enables decision-theoretic definitions of important concepts in the descriptive study of probabilistic judgement.
    Keywords: Sample; Sample size; Learning; uncertainty
    JEL: D81 D83
    Date: 2022–11–24
  12. By: Anna D'Annunzio; Antonio Russo
    Abstract: We analyze the effects of commodity taxation in markets where suppliers implement second-degree price discrimination schemes, such as offering different package sizes and quality-differentiated versions of the same product. In these markets, suppliers distort the quantity (or quality) intended for all types of consumers, except for those with the highest marginal willingness to pay. We show that differentiated ad valorem taxes can alleviate this distortion, and thus increase government revenue as well as welfare, provided the tax rate increases with the size (or quality) of the good supplied.
    Keywords: commodity taxation, tax incidence, price discrimination
    JEL: D40 H21 H22 L10
    Date: 2022
  13. By: Eguia, Jon (Michigan State University, Department of Economics); Hu, Tai-Wei (University of Bristol)
    Abstract: We present a theory of endogenous policy preferences and electoral competition with boundedly rational voters who find it costly to process detailed information. Voters are otherwise fully rational, and they strategically choose how much memory to devote to processing political information. We find that even if all voters start with a common prior such that they all prefer a moderate policy over extreme alternatives to the left or the right, and even if voters observe only common signals that in the limit would assure a perfectly rational agent that the moderate policy is indeed best for everyone, a majority of voters eventually become extreme and the electorate becomes polarized: some voters support the left policy, and some support the right policy. Two fully rational parties respond by proposing extreme platforms, and thereafter, the policy outcome in every period is extreme.
    Keywords: Polarization; extremism; rational inattention; bounded memory; electoral competition
    JEL: D72
    Date: 2022–10–13
  14. By: Lu, Qiuyu
    Abstract: This paper examines the licensing strategy of a monopoly content provider that supplies horizontally differentiated content through downstream distributors to consumers who can potentially purchase from both distributors. When consumers' additional gain from the second purchase is high, the mismatch cost is low, and the quality of the extra content is high, some consumers purchase from both firms, which is called multi-homing. Apart from that, all consumers purchase from either distributor. When some consumers multi-home, the content provider always licenses to only one distributor. When all consumers single-home, the content provider either licenses to one distributor or shares the licensing.
    Keywords: Multi-homing, Licensing, Exclusive Dealing, Digital Content, Online Platform
    JEL: D43 L13 L42
    Date: 2022–11–09
  15. By: Dewenter, Ralf (Helmut Schmidt University, Hamburg); Löw, Franziska (Helmut Schmidt University, Hamburg)
    Abstract: In contrast to traditional business models, two-sided platforms internalize indirect network effects that exist between different groups of platform participants. The strength of the network effects has a decisive influence on the success of the platform and its market position. Markets with particularly strong network effects are also often characterized by a high degree of concentration. However, the strength of the network effects is not exogenously given but can be influenced by targeted investment. This paper analyses how platforms can affect network effects by investing in appropriate infrastructure, data, or artificial intelligence. We derive optimal quantities, prices, profits, and investments depending on different types of investments.
    Keywords: two-sided markets; indirect network effects; endogenous network effects; optimal investment strategy
    JEL: D21 D42 L10
    Date: 2022–08–09

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