nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒12‒19
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. False Information from Near and Far By Christophe Bravard; Jacques Durieu; Sudipta Sarangi; Stéphan Sémirat
  2. Revenue Comparisons of Auctions with Ambiguity Averse Sellers By Sosung Baik; Sung-Ha Hwang
  3. Efficiency, durability and ordinality in 2-person bargaining with incomplete information By Eric van Damme; Xu Lang
  4. Coordination through ambiguous language By Michele Crescenzi
  5. Discovery through Trial Balloons By Eitan Sapiro-Gheiler
  6. Status Quo Bias and Hidden Condorcet Cycles in Binary Referendums By Andersson, Tommy
  7. Gaussian Agency problems with memory and Linear Contracts By Eduardo Abi Jaber; Stéphane Villeneuve
  8. Optimal Pricing Schemes in the Presence of Social Learning and Costly Reporting By Kaiwei Zhang; Xi Weng
  9. Collaboration Between and Within Groups By Matias Iaryczower; Santiago Oliveros; Parth Parihar
  10. Can data openness unlock competition when the incumbent has exclusive data access for personalized pricing? By Rosa Branca Esteves; Francisco Carballo-Cruz
  11. Differentiation Strategy for Firms: Online Ad versus Mass Media Ad By Fujisawa, Chieko; Kasuga, Norihiro
  12. Internet infrastructure and competition in digital markets By Hanspach, Philip
  13. Worst-case Regret in Ambiguous Dynamic Games By Rumen Kostadinov
  14. Arbitrage from a Bayesian's Perspective By Ayan Bhattacharya
  15. Lending and monitoring: Big Tech vs Banks By Bouvard, Matthieu; Casamatta, Catherine; Xiong, Rui

  1. By: Christophe Bravard (GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes); Jacques Durieu (CREG - Centre de recherche en économie de Grenoble - UPMF - Université Pierre Mendès France - Grenoble 2, GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes); Sudipta Sarangi (DIW Berlin - Deutsches Institut für Wirtschaftsforschung, Virginia Tech [Blacksburg]); Stéphan Sémirat (GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes)
    Abstract: We study message credibility in social networks with biased and unbiased agents. Biased agents prefer a specific outcome while unbiased agents prefer the true state of the world. Each agent who receives a message knows the identity (but not type) of the message creator and only the identity and types of their immediate neighbors. We characterize the perfect Bayesian equilibria of this game and demonstrate filtering by the network: the posterior beliefs of agents depend on the distance a message travels. Unbiased agents, who receive a message from a biased agent, are more likely to assign a higher credibility and transmit it further when they are further away from the source. For a given network, we compute the probability that it will always support the communication of messages by unbiased agents. Finally, we establish that under certain parameters, this probability increases when agents are uncertain about their network location.
    Keywords: Influential Players,Filter,Network
    Date: 2022
  2. By: Sosung Baik; Sung-Ha Hwang
    Abstract: We study the revenue comparison problem of auctions when the seller has a maxmin expected utility preference. The seller holds a set of priors around some reference belief, interpreted as an approximating model of the true probability law or the focal point distribution. We develop a methodology for comparing the revenue performances of auctions: the seller prefers auction X to auction Y if their transfer functions satisfy a weak form of the single-crossing condition. Intuitively, this condition means that a bidder's payment is more negatively associated with the competitor's type in X than in Y. Applying this methodology, we show that when the reference belief is independent and identically distributed (IID) and the bidders are ambiguity neutral, (i) the first-price auction outperforms the second-price and all-pay auctions, and (ii) the second-price and all-pay auctions outperform the war of attrition. Our methodology yields results opposite to those of the Linkage Principle.
    Date: 2022–11
  3. By: Eric van Damme; Xu Lang
    Abstract: We consider two-person bargaining problems in which (only) the players' disagreement payoffs are private information and it is common knowledge that disagreement is inefficient. We show that if the Pareto frontier is linear, or the utility functions are quasi-linear, the outcome of an ex post efficient mechanism must be independent of the players' disagreement values. Hence, in this case, a bargaining solution must be ordinal: the players' interim expected utilities cannot depend on the intensity of their preferences. For a non-linear frontier, the result continues to hold if disagreement payoffs are independent or if one of the players only has a few types. We discuss implications of these results for axiomatic bargaining theory and for full surplus extraction in mechanism design.
    Date: 2022–11
  4. By: Michele Crescenzi
    Abstract: We provide a syntactic construction of correlated equilibrium. For any finite game, we study how players coordinate their play on a signal by means of a public strategy whose instructions are expressed in some natural language. Language can be ambiguous in that different players may assign different truth values to the very same formula in the same state of the world. We model ambiguity using the player-dependent logic of Halpern and Kets (2015). We show that, absent any ambiguity, self-enforcing coordination always induces a correlated equilibrium of the underlying game. When language ambiguity is allowed, self-enforcing coordination strategies induce subjective correlated equilibria.
    Date: 2022–11
  5. By: Eitan Sapiro-Gheiler
    Abstract: A principal and an agent face symmetric uncertainty about the value of two correlated projects for the agent. The principal chooses which project values to publicly discover and then makes a proposal to the agent, who accepts if and only if the expected sum of values is positive. We characterize optimal discovery for various principal preferences: maximizing the probability of the grand bundle, of having at least one project approved, and of a weighted combination of projects. Our results highlight the usefulness of trial balloons: projects which are ex-ante disfavored but have higher variance than a more favored alternative. Disfavored projects may be optimal even when they have lower variance than the alternative, so long as there is sufficient risk that alternative could be rejected by the agent. These conclusions rationalize the inclusion of controversial policies in omnibus bills and the presence of moonshot projects in organizations.
    Date: 2022–11
  6. By: Andersson, Tommy (Department of Economics, Lund University)
    Abstract: In most real-life binary referendums, there are several alternatives that potentially can challenge the status quo alternative. Depending on which alternative that is selected, the voters are also differently likely to caste their vote on it. The fact that there are several potential challenger alternatives also means that there may exist Condorcet cycles that only can be identified by taking into account the alternatives that not are listed on the ballot. We analyse such "hidden" cycles in a simple theoretical framework where Condorcet cycles cannot exist, but may emerge when taking into account that voters often experience a reluctance to abandon the status quo alternative. Necessary and sufficient conditions for the existence of hidden Condorcet cycles are derived and a Monte Carlo simulation finds (in different scenarios) that the probability is roughly one percent.
    Keywords: binary referendum; hidden Condorcet cycles; non-trivial referendums; Monte Carlo study
    JEL: D72
    Date: 2022–11–21
  7. By: Eduardo Abi Jaber (X - École polytechnique); Stéphane Villeneuve (TSE-R - 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)
    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 between linear contracts and optimal contracts for more general quadratic costs of efforts.
    Keywords: Principal-Agent,Models,Continuous-time control problems
    Date: 2022
  8. By: Kaiwei Zhang; Xi Weng
    Abstract: A monopoly platform sells either a risky product (with unknown utility) or a safe product (with known utility) to agents who sequentially arrive and learn the utility of the risky product by the reporting of previous agents. It is costly for agents to report utility; hence the platform has to design both the prices and the reporting bonus to motivate the agents to explore and generate new information. We characterize the optimal bonus and pricing schemes offered by the profit-maximizing platform. It turns out that the optimal scheme falls into one of four types: Full Coverage, Partial Coverage, Immediate Revelation, and Non-Bonus. In a model of exponential bandit, we find that there is a dynamical switch of the types along the learning trajectory. Although learning stops efficiently, information is revealed too slowly compared with the planner's optimal solution.
    Date: 2022–11
  9. By: Matias Iaryczower; Santiago Oliveros; Parth Parihar
    Abstract: We study the ability of multi-group teams to undertake binary projects in a decentralized environment. The equilibrium outcomes of our model display familiar features in collaborative settings, including inefficient gradualism, inaction, and contribution cycles, wherein groups alternate taking responsibility for moving the project forward. Expected delay grows more than proportionally with project size, and some welfare-enhancing projects are not completed, even as agents become arbitrarily patient. A team composed of two equally large groups can complete larger projects than a fully homogenous team, even as the difference in preferences for completion among the two groups is arbitrarily small. Moreover, if the project is sufficiently large, the two-group team always completes the project strictly faster.
    JEL: C72 D72
    Date: 2022–11
  10. By: Rosa Branca Esteves (Universidade do Minho and NIPE); Francisco Carballo-Cruz (Universidade do Minho and NIPE)
    Abstract: This paper investigates the role of an incumbent´s data investment decisions in shaping the competitive interaction of firms and market structure. We provide antitrust agencies with some insights that may help them to determine whether and when personalized pricing (PP) by a dominant firm, which is enabled by the use of exclusive data, dampens competition and harms consumers. In markets with intermediate entry costs, where entry is blocked without any intervention, a data openness remedy, by means of a mandatory information sharing, is an effective tool to restore competition and boost consumer welfare. Even in markets where entry is inevitable, due to low entry costs, a mandatory information sharing to promote competitive PP further boosts consumer surplus in comparison to the case where only the incumbent employs PP. In contrast, public agencies should consider a ban on PP in markets with sufficiently high entry costs. In these markets, a mandatory information sharing remedy would simply not produce the desired competitive outcome.
    Keywords: Price discrimination, data investments, data barrier to entry, information, sharing, digital markets, GDPR, competition policy and regulation.
    JEL: D43 L13
    Date: 2021
  11. By: Fujisawa, Chieko; Kasuga, Norihiro
    Abstract: This study analyzes advertiser firms' product differentiation strategies and the relationship two media advertising effect, mass media and online media. We derive an inverse demand function from the utility function relating to the evaluation of the goods' additional information that consumers obtain from advertisements, and we analyze the advertising choices of firms using a two-stage decision-making model. The analysis results indicate that firms choose asymmetric advertising to take advantage of the interdependent effects of two advertising and differentiation and to increase profit through rivals' advertising effects. However, the profits of firms are the highest when both firms choose the discriminatory online media advertising. Social welfare is highest in symmetric choice of the discriminatory online advertising, but consumer surplus is highest in symmetric choice of the discriminatory mass media advertising.
    Keywords: Online media advertising,Mass media advertising,Targeting,Differentiation Strategy,Interaction
    Date: 2022
  12. By: Hanspach, Philip
    Abstract: Large digital platform companies increasingly integrate vertically by building Internet infrastructure, such as edge computing facilities, content delivery networks, or submarine cables. These investments enable new services while changing their bargaining power towards the upstream supplier. I model competing investment incentives in Internet infrastructure for an upstream player (e.g., an Internet Service Provider) and a large downstream platform and its effects on competition with smaller downstream platforms without proprietary infrastructure. Investment incentives increase discontinuously both upstream and downstream when the downstream platform has the larger network. With symmetric investment costs, the downstream platform will invest more than a pure upstream player. I discuss the model implications for net neutrality, network access regulation, and efficient side payments between platform and upstream industry.
    Keywords: platforms,multi-sided markets,competition policy,net neutrality,Internet,telecommunications infrastructure
    JEL: L13 L42 L51 L63 L86
    Date: 2022
  13. By: Rumen Kostadinov
    Abstract: I study a general model of repeated interactions between long-run players who have no probabilistic beliefs about the environment in which future interactions will take place. I introduce a notion of equilibrium, where at each history players minimise their regret from forgoing an alternative strategy under the worst-case sequence of future games, taking as given the strategies of other players. I derive a recursive characterisation of equilibrium outcomes for fixed discounting, as well as a folk theorem. I demonstrate the tractability of the characterisation in applications to risk-sharing and partnership games.
    Keywords: dynamic games; repeated games; regret minimization
    JEL: C73 D81
    Date: 2022–11
  14. By: Ayan Bhattacharya
    Abstract: This paper builds a model of interactive belief hierarchies to derive the conditions under which judging an arbitrage opportunity requires Bayesian market participants to exercise their higher-order beliefs. As a Bayesian, an agent must carry a complete recursion of priors over the uncertainty about future asset payouts, the strategies employed by other market participants that are aggregated in the price, other market participants' beliefs about the agent's strategy, other market participants beliefs about what the agent believes their strategies to be, and so on ad infinitum. Defining this infinite recursion of priors -- the belief hierarchy so to speak -- along with how they update gives the Bayesian decision problem equivalent to the standard asset pricing formulation of the question. The main results of the paper show that an arbitrage trade arises only when an agent updates his recursion of priors about the strategies and beliefs employed by other market participants. The paper thus connects the foundations of finance to the foundations of game theory by identifying a bridge from market arbitrage to market participant belief hierarchies.
    Date: 2022–11
  15. By: Bouvard, Matthieu; Casamatta, Catherine; Xiong, Rui
    Abstract: We show that by lending to merchants and monitoring them, an e-commerce platform can price-discriminate between merchants with high and low financial constraints: the platform offers credit priced below market rates and designed to select merchants with lower capital or collateral while simultaneously increasing the platform’s access fees. The credit market then becomes endogenously segmented with banks focusing on less financially constrained borrowers. Lending by the platform expands with its monitoring efficiency but can arise even when the platform is less efficient than banks at monitoring. Platform credit benefits more financially constrained merchants as well as buyers, but can hurt less financially constrained merchants if cross-side network effects with buyers are too small. The platform’s propensity to offer credit and the financial inclusion of more constrained merchants depends on the platform’s market power.
    Keywords: Big Tech; banks; two-sided markets; financial constraints; financial inclusion;; market power
    Date: 2022–11

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