nep-mic New Economics Papers
on Microeconomics
Issue of 2023‒01‒23
nineteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Screening with Persuasion By Dirk Bergemann; Tibor Heumann; Stephen Morris
  2. Regulation with Experimentation: Ex Ante Approval, Ex Post Withdrawal, and Liability By Emeric Henry; Marco Loseto; Marco Ottaviani
  3. Strategic Observational Learning By Dimitri Migrow
  4. Optimal Refund Mechanism By Qianjun Lyu
  5. Truth-telling Outcomes in a Reputational Cheap-talk Game with Binary Types By Dohui Woo
  6. Biased Beliefs in Search Markets By Gamp, Tobias; Krähmer, Daniel
  7. Competition in Search Markets with Naive Consumers By Gamp, Tobias; Krähmer, Daniel
  8. Aggregate Information and Organizational Structures By Celik, Gorkem; Shin, Dongsoo; Strausz, Roland
  9. Test Design Under Falsification By Eduardo Perez-Richet; Vasiliki Skreta
  10. Optimal Robust Mechanism in Bilateral Trading By Komal Malik
  11. Welfare-enhancing taxation and price discrimination By Anna D’Annunzio; Antonio Russo
  12. Approximate Bayesian Implementation and Exact Maxmin Implementation: An Equivalence By Song, Yangwei
  13. Intertemporal Hedging and Trade in Repeated Games with Recursive Utility By Kochov, Asen; Song, Yangwei
  14. Digital Gold? Pricing, Inequality and Participation in Data Markets By Charlson, G.
  15. A pure theory of population distribution when preferences are ordinal By Stark, Oded; Kosiorowski, Grzegorz
  16. Sequential Sampling Equilibrium By Duarte Gon\c{c}alves
  17. A Characterization of Maximum Nash Welfare for Indivisible Goods By Warut Suksompong
  18. Oligopoly Pricing: The Role of Firm Size and Number By Bos, Iwan; Marini, Marco A.
  19. Rational Inattention: A Review By Bartosz Maćkowiak; Filip Matějka; Mirko Wiederholt

  1. By: Dirk Bergemann; Tibor Heumann; Stephen Morris
    Abstract: We consider a general nonlinear pricing environment with private information. The seller can control both the signal that the buyers receive about their value and the selling mechanism. We characterize the optimal menu and information structure that jointly maximize the seller's profits. The optimal screening mechanism has finitely many items even with a continuum of values. We identify sufficient conditions under which the optimal mechanism has a single item. Thus the seller decreases the variety of items below the efficient level as a by-product of reducing the information rents of the buyer.
    Date: 2022–12
  2. 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
  3. By: Dimitri Migrow
    Abstract: This paper characterizes equilibrium behavior of forward-looking agents in a simple repeated-action setting of social learning with two privately informed players. If players have access to a symmetric signal structure (in a sense to be made precise), then myopic strategies always constitute an equilibrium. Myopic equilibrium is unique under symmetric threshold strategies, and under the simplest symmetric non-monotonic strategies. Under arbitrary threshold strategies, only myopic equilibrium can fully aggregate dispersed private information. If the players are asymmetric and the game is infinite, there is no equilibrium in myopic strategies, for any positive degree of patience.
    Date: 2022–12
  4. By: Qianjun Lyu (Institute for Microeconomics, University of Bonn)
    Abstract: This paper studies the optimal refund mechanism when an uninformed buyer can privately acquire information about his valuation over time. In principle, a refund mechanism can specify the odds that the seller requires the product returned while issuing a (partial) refund, which we call stochastic return. It guarantees the seller a strictly positive minimum revenue and facilitates intermediate buyer learning. In the benchmark model, stochastic return is sub-optimal. The optimal refund mechanism takes simple forms: the seller either deters learning via a well-designed non-refundable price or encourages full learning and escalates price discrimination via free return. This result is robust to both good news and bad news framework.
    Keywords: buyer learning, refund contract, information design, implementable mechanism
    JEL: D82 D86 L15
    Date: 2022–12
  5. By: Dohui Woo
    Abstract: Experts with different abilities of information acquisition who receive multiple pieces of signals over time can choose the timing of recommendation and whether to be truthful in a later period, when a recommendation is made in an earlier period. Giving inconsistent recommendations may be seen as a sign of a poor information acquisition ability, but it can also work as a "safety net" that prevents the worst reputation. This study uses a simple binary-ability framework to capture this aspect and proposes equilibriums where all information is delivered truthfully on the path. I examine when such an equilibrium exists, and compare such equilibriums with those where only partial information is delivered; it is found that the former brings higher expected payoffs to the expert than the latter under a certain range of parameters when the utility function is strictly convex in the reputation.
    Keywords: truth-telling, reputation concerns, cheap talks
    JEL: D72 L14
    Date: 2022–12
  6. By: Gamp, Tobias (HU Berlin); Krähmer, Daniel (University of Bonn)
    Abstract: We study the implications of biased consumer beliefs for search market outcomes in the seminal framework due to Diamond (1971). Biased consumers base their search strategy on a belief function which specifies for any (true) distribution of utility offers in the market a possibly incorrect distribution of utility offers. If biased consumers overestimate the best offer in the market, a novel type of equilibrium may emerge in which firms make exceptionally favourable offers in order to meet biased consumers' unreasonable high expectations which then become partially self-fulfilling. Consequently, the presence of biased consumers may improve the welfare of all consumers.
    Keywords: consumer search; bounded rationality; cursed beliefs;
    JEL: D18 D21 D43 D83
    Date: 2022–12–30
  7. By: Gamp, Tobias (HU Berlin); Krähmer, Daniel (University of Bonn)
    Abstract: We study the interplay between quality provision and consumer search in a search market where firms may design products of inferior quality to promote them to naive consumers who fail to fully understand product characteristics. We derive an equilibrium in which both superior and inferior quality is offered and show that as search frictions vanish, the share of firms offering superior goods in the market goes to zero. The presence of inferior products harms sophisticated consumers, as it forces them to search longer to find a superior product. We argue that policy interventions that reduce search frictions such as the standardization of price and package formats may harm welfare. In contrast, reducing the number of naive consumers through transparency policies and education campaigns as well as a minimum quality standard can improve welfare.
    Keywords: inferior products; competition; naivete; consumer search;
    JEL: D18 D21 D43 D83
    Date: 2022–12–30
  8. By: Celik, Gorkem (ESSEC Business School and THEMA Research Center); Shin, Dongsoo (Santa Clara University); Strausz, Roland (HU Berlin)
    Abstract: We study information flows in an organization with a top management (principal) and multiple subunits (agents) with private information that determines the organization's aggregate efficiency. Under centralization, eliciting the agents' private information may induce the principal to manipulate aggregate information, which obstructs an effective use of information for the organization. Under delegation, the principal concedes more information rent, but is able to use the agents' information more effectively. The trade-off between the organizational structures depends on the likelihood that the agents are efficient. Centralizing information flows is optimal when such likelihood is low. Delegation, by contrast, is optimal when it is high.
    Keywords: agency; aggregate information; organization design;
    JEL: D86 L23 L25
    Date: 2022–12–27
  9. 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
  10. By: Komal Malik
    Abstract: We consider a model of bilateral trade with private values. The value of the buyer and the cost of the seller are jointly distributed. The true joint distribution is unknown to the designer, however, the marginal distributions of the value and the cost are known to the designer. The designer wants to find a trading mechanism that is robustly Bayesian incentive compatible, robustly individually rational, budget-balanced and maximizes the expected gains from trade over all such mechanisms. We refer to such a mechanism as an optimal robust mechanism. We establish equivalence between Bayesian incentive compatible mechanisms (BIC) and dominant strategy mechanisms (DSIC). We characterise the worst distribution for a given mechanism and use this characterisation to find an optimal robust mechanism. We show that there is an optimal robust mechanism that is deterministic (posted-price), dominant strategy incentive compatible, and ex-post individually rational. We also derive an explicit expression of the posted-price of such an optimal robust mechanism. We also show the equivalence between the efficiency gains from the optimal robust mechanism (max-min problem) and guaranteed efficiency gains if the designer could choose the mechanism after observing the true joint distribution (min-max problem).
    Date: 2022–12
  11. By: Anna D’Annunzio (: TBS Business School); Antonio Russo (Department of Economics, University of Sheffield and CESifo)
    Abstract: We study commodity taxation in markets where suppliers implement second-degree price discrimination, by offering different package sizes or quality-differentiated versions of a 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 of the package (or quality of the version) of the good supplied.
    Keywords: Commodity taxation, tax incidence, price discrimination
    JEL: D4 H21 H22 L1
    Date: 2023–01
  12. By: Song, Yangwei (HU Berlin)
    Abstract: This paper provides a micro-foundation for approximate incentive compatibility using ambiguity aversion. In particular, we propose a novel notion of approximate interim incentive compatibility, approximate local incentive compatibility, and establish an equivalence between approximate local incentive compatibility in a Bayesian environment and exact interim incentive compatibility in the presence of a small degree of ambiguity. We then apply our result to the implementation of efficient allocations. In particular, we identify three economic settings—including ones in which approximately efficient allocations are implementable, ones in which agents are informationally small, and large double auctions—in which efficient allocations are approximately locally implementable when agents are Bayesian. Applying our result to those settings, we conclude that efficient allocations are exactly implementable when agents perceive a small degree of ambiguity.
    Keywords: approximate local incentive compatibility; ambiguity aversion; efficiency; informational size; modified VCG mechanism; double auction;
    Date: 2022–12–28
  13. By: Kochov, Asen (University of Rochester); Song, Yangwei (HU Berlin)
    Abstract: Recursive preferences have found widespread application in representative-agent asset-pricing models and general equilibrium. A majority of these applications exploit two decision-theoretic properties not shared by the standard model of intertemporal choice: (i) agents care about the intertemporal distribution of risk and (ii) rates of time preference, rather than being exogenously fixed, may vary with the level of consumption. We investigate what these features imply in the context of a repeated strategic interaction. Specifically, we identify novel opportunities for the players to manage risk and trade intertemporally, and characterize when such opportunities lead to an expansion of the feasible set of payoffs. Sharp implications for equilibrium behavior and the folk theorem are also deduced.
    Keywords: recursive utility; repeated games; correlation aversion; endogenous discounting; intertemporal trade; intertemporal hedging;
    Date: 2022–12–28
  14. By: Charlson, G.
    Abstract: I examine inequalities arising from biases brought by the incentives and externalities present in data markets, where a data collector ultimately provides an end-service which is beneficial. Agents receive different prices for their data, which is valued according to the extent that it is representative of the data of non-participating agents. The service provider estimates the characteristics of high-cost and minority groups with less accuracy, leading to these groups receiving lower quality services on average, and lower utility in equilibrium. Data privacy policies tend to reduce such inequalities but at the cost of consumer surplus, while a subsidy strategy targeted at increasing the utility of those disadvantaged by data markets increases consumer surplus but may also widen inequality.
    Date: 2022–10–19
  15. By: Stark, Oded; Kosiorowski, Grzegorz
    Abstract: We model an environment in which individuals prefer to be in a space in which their rank is higher, be it a social space, a geographical space, a work environment, or any other comparison sphere which we refer to in this paper, and without loss of generality, as a region. When the individuals can choose between more than two regions, we inquire: (i) whether a steady-state distribution of the population is reached; (ii) how long it will take to reach a steady state; and (iii) if a steady state obtains, whether at the steady state social welfare is maximized. Despite the fact that when there are three or more regions the mobility paths are more intricate than when there are only two regions, we prove that a steady-state distribution of the population across the regions is reached; we identify the upper bound of the number of time periods that it will take to reach the steady-state distribution; and we show that the steady-state distribution maximizes social welfare. This last result is surprising: even though the individuals act of their own accord, they achieve the socially preferred outcome.
    Keywords: Community/Rural/Urban Development
    Date: 2023–01–11
  16. By: Duarte Gon\c{c}alves
    Abstract: This paper introduces an equilibrium framework based on sequential sampling in which players face strategic uncertainty over their opponents' behavior and acquire information to resolve it. Sequential sampling equilibrium delivers a disciplined model featuring an endogenous distribution of choices, beliefs, and decision times, that not only rationalizes well-known deviations from Nash equilibrium, but also makes novel predictions supported by existing data. It grounds a relationship between empirical learning and strategic sophistication, and generates stochastic choice through randomness inherent to sampling, without relying on indifference or choice mistakes. Further, it provides a rationale for Nash equilibrium when information costs vanish.
    Date: 2022–12
  17. By: Warut Suksompong
    Abstract: In the allocation of indivisible goods, the maximum Nash welfare (MNW) rule, which chooses an allocation maximizing the product of the agents' utilities, has received substantial attention for its fairness. We characterize MNW as the only additive welfarist rule that satisfies envy-freeness up to one good. Our characterization holds in the simplest setting of two agents.
    Date: 2022–12
  18. By: Bos, Iwan; Marini, Marco A.
    Abstract: This paper examines a homogeneous-good Bertrand-Edgeworth oligopoly model to explore the role of firm size and number in pricing. We consider the price impact of merger, breakup, investment, divestment, entry, and exit. A merger leads to higher prices only when it increases the size of the largest seller and industry capacity is neither too big nor too small post-merger. Similarly, breaking-up a firm only leads to lower prices when it concerns the biggest producer and aggregate capacity is within an intermediate range. Investment and entry (weakly) reduce prices, whereas divestment and exit yield (weakly) higher prices. Taken together, these findings suggest that size matters more than number in the determination of oligopoly prices.
    Keywords: Bertrand-Edgeworth Competition; Edgeworth Price Cycle; Firm Size Distribution; Oligopoly Pricing; Price Dispersion
    JEL: D43 L1 L12 L13
    Date: 2022–12–15
  19. By: Bartosz Maćkowiak (CEPR - Center for Economic Policy Research - CEPR); Filip Matějka (CEPR - Center for Economic Policy Research - CEPR); Mirko Wiederholt (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR)
    Abstract: We review the recent literature on rational inattention, identify the main theoretical mechanisms, and explain how it helps us understand a variety of phenomena across fields of economics. The theory of rational inattention assumes that agents cannot process all available information, but they can choose which exact pieces of information to attend to. Several important results in economics have been built around imperfect information. Nowadays, many more forms of information than ever before are available due to new technologies, and yet we are able to digest little of it. Which form of imperfect information we possess and act upon is thus largely determined by which information we choose to pay attention to. These choices are driven by current economic conditions and imply behavior that features numerous empirically supported departures from standard models. Combining these insights about human limitations with the optimizing approach of neoclassical economics yields a new, generally applicable model.
    Date: 2022

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