nep-mic New Economics Papers
on Microeconomics
Issue of 2023‒01‒16
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Data, Competition, and Digital Platforms By Dirk Bergemann; Alessandro Bonatti
  2. Informational Intermediation, Market Feedback, and Welfare Losses By Wenji Xu; Kai Hao Yang
  3. On the Role of Bargaining Power in Nash-in-Nash Bargaining: When More is Less By Marc Escrihuela-Villar; Walter Ferrarese; Alberto Iozzi
  4. The Simple Economics of Optimal Bundling By Frank Yang
  5. On Hurwicz Preferences in Psychological Games By Giuseppe De Marco; Maria Romaniello; Alba Roviello
  6. Price & Choose By Federico Echenique; Mat\'ias N\'u\~nez
  7. Political Correctness and Elite Prestige By Esther Hauk; Javier Ortega
  8. Communication via Third Parties By Jacopo Bizzotto; Eduardo Perez-Richet; Adrien Vigier
  9. Sequential Cursed Equilibrium By Shani Cohen; Shengwu Li
  10. Test Design Under Falsification By Eduardo Perez-Richet; Vasiliki Skreta
  11. On the Complexities of Understanding Matching Mechanisms By Yannai A. Gonczarowski; Clayton Thomas
  12. Acquisition-induced kill zone By Christopher Teh; Dyuti Banerjee; Chengsi Wang
  13. Bayesian Opponent Modeling in Multiplayer Imperfect-Information Games By Sam Ganzfried; Kevin A. Wang; Max Chiswick
  14. Repeat Voting: Two-Vote May Lead More People To Vote By Sergiu Hart
  15. Single-Crossing Differences in Convex Environments By Navin Kartik; SangMok Lee; Daniel Rappoport
  16. Regulation with Experimentation: Ex Ante Approval, Ex Post Withdrawal, and Liability By Emeric Henry; Marco Loseto; Marco Ottaviani
  17. On the Origin and Persistence of Identity-Driven Choice Behavior By Liqui Lung, C. W.

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Alessandro Bonatti
    Abstract: We propose a model of intermediated digital markets where data and heterogeneity in tastes and products are defining features. A monopolist platform uses superior data to match consumers and multiproduct advertisers. Consumers have heterogenous preferences for the advertisers' product lines and shop on- or off-platform. The platform monetizes its data by selling targeted advertising space that allows advertisers to tailor their products to each consumer's preferences. We derive the equilibrium product lines and advertising prices. We identify search costs and informational advantages as two sources of the platform's bargaining power. We show that privacy-enhancing data-governance rules, such as those corresponding to federated learning, can lead to welfare gains for the consumers.
    Keywords: Data, Privacy, Data Governance, Digital Advertising, Competition, Digital Platforms, Digital Intermediaries, Personal Data, Matching, Price Discrimination
    JEL: D18 D44 D82 D83
    Date: 2022–08
  2. By: Wenji Xu (College of Business, City University of Hong Kong); Kai Hao Yang (Cowles Foundation and School of Management, Yale University)
    Abstract: This paper examines the welfare implications of third-party informational intermediation. A seller sets the price of a product that is sold through an informational intermediary. The intermediary can disclose information about the product to consumers and earns a fixed percentage of sales revenue in each period. The intermediary's market base grows at a rate that increases with past consumer surplus. We characterize the stationary equilibria and the set of subgame perfect equilibrium payoffs. When market feedback (i.e., the extent to which past consumer surplus affects future market bases) increases, welfare may decrease in the Pareto sense.
    Keywords: Informational intermediary, market size, market feedback, consumer surplus, Pareto-inferior outcomes, Markov perfect equilibrium, subgame perfect equilibrium.
    JEL: C73 D61 D82 D83 L15 M37
    Date: 2022–10
  3. By: Marc Escrihuela-Villar (Universitat de les Illes Balears); Walter Ferrarese (Universitat de Les Illes Balears); Alberto Iozzi (Università di Roma ‘Tor Vergata’ & SOAS University of London)
    Abstract: In bargainings, the parties’ bargaining powers (BPs) may determine not only how the surplus is shared (share effect), but also the size of the aggregate surplus (size effect). Since the size effect may be positive or negative, the sign of the effect on a party’s payoff of a change in her BP is in principle undetermined. We first look at a general model with a party (the principal) negotiating with two counterparts. At the Nash-in-Nash solution, we show that the equilibrium payoff of the principal may be decreasing in her BP. Necessary conditions for this to occur are an asymmetric bargaining model and a sufficiently large difference in the way the bargained upon variables affect the principal’s payoff. We then revisit a standard linear vertical industry with one upstream firm, downstream Cournot competition, and public contracts. A negative effect on the upstream firm’s profits deriving from an increase in her BP is always found when the firm has different BPs across the negotiations and final goods are complements. We map these conditions to those characterised in the general model.
    Keywords: bargaining power, Nash-in-Nash, vertical relations
    JEL: D21 D43 D86
    Date: 2022–12–22
  4. By: Frank Yang
    Abstract: We study optimal bundling when consumers differ in one dimension. We introduce a partial order on the set of bundles defined by (i) set inclusion and (ii) sales volumes (if sold alone and priced optimally). We show that if the undominated bundles with respect to this partial order are nested, then nested bundling (tiered pricing) is optimal. We characterize which nested menu is optimal: Selling a given menu of nested bundles is optimal if a smaller bundle in (out of) the menu sells more (less) than a bigger bundle in the menu. We apply these insights to connect optimal bundling and quality design to price elasticities and cost structures: (i) when price elasticities are quasi-convex on the set of bundles, nested bundling is always optimal and the optimal mechanism simply creates nests in the order of price elasticities; (ii) when consumers' preferences are multiplicative, the optimal quality design can be characterized by the lower monotone envelope of the average cost curve.
    Date: 2022–12
  5. By: Giuseppe De Marco (University of Naples Parthenope and CSEF); Maria Romaniello (University Campania Vanvitelli); Alba Roviello (University Campania Vanvitelli)
    Abstract: The literature on strategic ambiguity in classical games provides generalized notions of equilibrium in which each player best responds to ambiguous or imprecise beliefs about hisopponents’ strategy choices. In a recent paper, strategic ambiguity has been extended topsychological games, by taking into account ambiguous hierarchies of beliefs and maxmin preferences. Given that this kind of preference seems too restrictive as a general method to evaluate decisions, in this paper we extend the analysis by taking into account a-maxmin preferences in which decisions are evaluated by a convex combination of the worst-case (with weight a) and the best-case (with weight 1-a) scenarios. We give the definition of a-maxmin Psychological Nash Equilibrium; an illustrative example shows that the set of equilibria is affected by the parameter a and the larger is ambiguity the greater is the effect. We also provide a result of stability of the equilibria with respect to perturbations that involve the attitudes toward ambiguity, the structure of ambiguity and the payoff functions: converging sequences of equilibria of perturbed games converge to equilibria of the unperturbed game as the perturbation vanishes. Surprisingly, a final example shows that existence of equilibria is not guaranteed for every value of a.
    Keywords: Psychological games, ambiguous beliefs, a-MEU, equilibrium existence.
  6. By: Federico Echenique; Mat\'ias N\'u\~nez
    Abstract: We describe a two-stage mechanism that fully implements the set of efficient outcomes in two-agent environments with quasi-linear utilities. The mechanism asks one agent to set prices for each outcome, and the other agent to make a choice, paying the corresponding price: Price \& Choose. We extend our implementation result in three main directions: an arbitrary number of players, non-quasi linear utilities, and robustness to max-min behavior. Finally, we discuss how to reduce the payoff inequality between players while still achieving efficiency.
    Date: 2022–12
  7. By: Esther Hauk; Javier Ortega
    Abstract: Consider a society where the prestige of orthodox views is linked to the prestige of the elite. Heterodox individuals are less likely to express their views if other peers refrain from doing so and if the elite is prestigious. In turn, corruption by the elite is less easily detected if orthodox views dominate. We characterize equilibrium self-denial and corruption and show that an exogenous increase in the range of orthodox views may result in a decrease in the total number of individuals truthfully expressing their views. Some features of the model are shown to be compatible with U.S. data.
    Keywords: political correctness, Overton window, social pressure, conformity, preference falsification
    JEL: C72 D7 Z1 Z13
    Date: 2022–12
  8. By: Jacopo Bizzotto (OsloMet - Oslo Metropolitan University); Eduardo Perez-Richet (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR); Adrien Vigier (UON - University of Nottingham, UK)
    Abstract: A principal designs an information structure and chooses transfers to an agent that are contingent on the action of a receiver. The principal faces a trade-off between, on the one hand, designing an information structure maximizing non-monetary payoffs, and on the other hand, minimizing the information rent that must be conceded to the agent in order to implement the information structure which the principal designed. We examine how this trade-off shapes communication. Our model can be applied to study the relationship between, e.g.: political organizations and the public relations companies that campaign on their behalf, firms and the companies marketing their products, consultancies and the analysts they employ.
    Keywords: Information Design, Moral Hazard, Agency Cost, Information Acquisition
    Date: 2022–11–27
  9. By: Shani Cohen; Shengwu Li
    Abstract: Cursed equilibrium posits that players in a Bayesian game neglect the relationship between their opponent's actions and their opponent's type (Eyster and Rabin, 2005). Sequential cursed equilibrium generalizes this idea to extensive games, including those with endogenous private information. It predicts that players neglect the information content of hypothetical events, but make correct inferences from observed events -- as is consistent with data from experiments on hypothetical thinking.
    Date: 2022–12
  10. By: Eduardo Perez-Richet (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR); Vasiliki Skreta (University of Texas at Austin [Austin], UCL - University College of London [London], CEPR - Center for Economic Policy Research - CEPR)
    Abstract: We study the optimal design of tests with manipulable inputs. Tests take a unidimensional state of the world as input and output, an informative signal to guide a receiver's approve or reject decision. The receiver wishes to only approve states that comply with her baseline standard. An agent with a preference for approval can covertly falsify the state of the world at a cost. We characterize receiver‐optimal tests and show they rely on productive falsification by compliant states. They work by setting a more stringent operational standard, and granting noncompliant states a positive approval probability to deter them from falsifying to the standard. We also study how falsification‐detection technologies improve optimal tests. They allow the designer to build an implicit cost of falsification into the test, in the form of signal devaluations. Exploiting this channel requires enriching the signal space.
    Keywords: Information Design,Falsification,Tests,Manipulation,Cheating,Persuasion
    Date: 2022–05–27
  11. By: Yannai A. Gonczarowski; Clayton Thomas
    Abstract: We study various novel complexity measures for two-sided matching mechanisms, applied to the popular real-world school choice mechanisms of Deferred Acceptance (DA) and Top Trading Cycles (TTC). In contrast to typical bounds in computer science, our metrics are not aimed to capture how hard the mechanisms are to compute. Rather, they aim to capture certain aspects of the difficulty of understanding or explaining the mechanisms and their properties. First, we study a set of questions regarding the complexity of how one agent's report can affect other facets of the mechanism. We show that in both DA and TTC, one agent's report can have a structurally complex effect on the final matching. Considering how one agent's report can affect another agent's set of obtainable options, we show that this effect has high complexity for TTC, but low complexity for DA, showing that one agent can only affect another in DA in a quantitatively controlled way. Second, we study a set of questions about the complexity of communicating various facets of the outcome matching, after calculating it. We find that when there are many more students than schools, it is provably harder to concurrently describe to each student her match in TTC than in DA. In contrast, we show that the outcomes of TTC and DA are equally hard to jointly verify, and that all agents' sets of obtainable options are equally hard to describe, showcasing ways in which the two mechanisms are comparably complex. Our results uncover new lenses into how TTC may be more complex than DA. This stands in contrast with recent results under different models, emphasizing the richness of the landscape of complexities of matching mechanisms. Our proofs uncover novel structural properties of TTC and DA, which may be of independent interest.
    Date: 2022–12
  12. By: Christopher Teh (UNSW Sydney); Dyuti Banerjee (Department of Economics, Monash University); Chengsi Wang (Department of Economics, Monash University)
    Abstract: We study the impact of a dominant incumbent’s acquisition on entry and R&D incentives in a model with multiple start-ups. The incumbent’s acquisition directly suppresses entry and can distort the non-target start-up’s R&D incentives by creating a kill zone. The reduced threat of entry can also cause the incumbent to shelve the acquired technology. Despite these negative effects, acquisitions generally affect consumer welfare ambiguously due to synergy benefits. We study the design of merger policies aimed at minimizing acquisition-related harms. We also show that entry-for-buyout may not be a valid defense for start-up acquisitions when accounting for non-target start-ups.
    Keywords: Acquisitions, Innovation, Start-ups, Merger Policy, Remedies
    JEL: G34 L12 L41 O31
    Date: 2022–12
  13. By: Sam Ganzfried; Kevin A. Wang; Max Chiswick
    Abstract: In many real-world settings agents engage in strategic interactions with multiple opposing agents who can employ a wide variety of strategies. The standard approach for designing agents for such settings is to compute or approximate a relevant game-theoretic solution concept such as Nash equilibrium and then follow the prescribed strategy. However, such a strategy ignores any observations of opponents' play, which may indicate shortcomings that can be exploited. We present an approach for opponent modeling in multiplayer imperfect-information games where we collect observations of opponents' play through repeated interactions. We run experiments against a wide variety of real opponents and exact Nash equilibrium strategies in three-player Kuhn poker and show that our algorithm significantly outperforms all of the agents, including the exact Nash equilibrium strategies.
    Date: 2022–12
  14. By: Sergiu Hart
    Abstract: A "repeat voting" procedure is proposed, whereby voting is carried out in two identical rounds. Every voter can vote in each round, the results of the first round are made public before the second round, and the final result is determined by adding up all the votes in both rounds. It is argued that this simple modification of election procedures may well increase voter participation and result in more accurate and representative outcomes.
    Date: 2022–11
  15. By: Navin Kartik; SangMok Lee; Daniel Rappoport
    Abstract: An agent's preferences depend on an ordered parameter or type. We characterize the set of utility functions with single crossing differences (SCD) in convex environments. These include preferences over lotteries, both in expected utility and rank-dependent utility frameworks, and preferences over bundles of goods and over consumption streams. Our notion of SCD does not presume an order on the choice space. This unordered SCD is necessary and sufficient for ``interval choice'' comparative statics. We present applications to cheap talk, observational learning, and collective choice, showing how convex environments arise in these problems and how SCD/interval choice are useful. Methodologically, our main characterization stems from a result on linear aggregations of single-crossing functions.
    Date: 2022–12
  16. By: Emeric Henry (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR); Marco Loseto (University of Chicago); Marco Ottaviani (Bocconi University [Milan, Italy], BIDSA - Bocconi Institute for Data Science and Analytics - Bocconi University [Milan, Italy], CEPR - Center for Economic Policy Research - CEPR, IGIER)
    Abstract: We analyze the optimal mix of ex ante experimentation and ex post learning for the dynamic adoption of activities with uncertain payoffs in a two-phase model of information diffusion. In a first preintroduction phase, costly experimentation is undertaken to decide whether to adopt an activity or abandon experimentation. In a second stage following adoption, learning can continue possibly at a different pace while the activity remains in place; the withdrawal option is exercised following the accumulation of sufficiently bad news. We compare from a law and economics perspective the performance of three regulatory frameworks commonly adopted to govern private experimentation and adoption incentives: liability, withdrawal, and authorization regulation. Liability should be preempted to avoid chilling of activities that generate large positive externalities consistent with the preemption doctrine. Liability should be used to discourage excessive experimentation for activities that generate small positive externalities. Authorization regulation should be lenient whenever it is used consistent with the organization of regulation in a number of areas, ranging from product safety to antitrust.
    Keywords: Authorization regulation,Liability,Withdrawal,Experimentation,Preemption doctrine
    Date: 2022–07
  17. By: Liqui Lung, C. W.
    Abstract: A recent literature shows how a priori identical individuals belonging to different social groups make different choices. This paper proposes a novel explanation for this identity-driven choice behavior. Agents choose whether to undertake a task with a probability of success driven by an ability. They have a noisy perception of this ability and observe social cues that stem from the prevalence of their subgroup among the successful individuals. Although the noise in their perception is unbiased, it has an asymmetric effect on expected utility. This makes it optimal for certain agents to bias their noisy perception with social cues, even when these cues are irrelevant in a Bayesian sense. I show the existence of a stable population equilibrium in which both task allocation and the use of social cues differ between a priori identical subgroups.
    JEL: D81 D91 I24 Z13
    Date: 2022–12–15

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