nep-mic New Economics Papers
on Microeconomics
Issue of 2023‒06‒12
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Communicating Preferences to Improve Recommendations By Amir Habibi
  2. A More Informed Sender Benefits the Receiver When the Sender Has Transparent Motives By Mark Whitmeyer
  3. Network Goods, Price Discrimination, and Two-sided Platforms By Paul Belleflamme; Martin Peitz
  4. Price Discrimination with Redistributive Concerns By Daniel M A Barreto; Alexis Ghersengorin; Victor Augias
  5. Strategic Foundations of Rational Expectations By Barelli, Paulo; Govindan, Srihari; Wilson, Robert
  6. Persuading a Wishful Thinker By Victor Augias; Daniel M A Barreto
  7. Suspecting Collusion By Ceesay, Muhammed
  8. Best-Response dynamics in two-person random games with correlated payoffs By Hlafo Alfie Mimun; Matteo Quattropani; Marco Scarsini
  9. Learning, Diversity and Adaptation in Changing Environments: The Role of Weak Links By Daron Acemoglu; Asuman Ozdaglar; Sarath Pattathil
  10. Behavioral Foundations of Model Misspecification By J. Aislinn Bohren; Daniel N. Hauser
  11. Endogenous privacy and heterogeneous price sensitivity By Masuyama, Ryo
  12. Beyond "Horizontal" and "Vertical": The Welfare Effects of Complex Integration By Margaret Loudermilk; Gloria Sheu; Charles Taragin
  13. Mechanism Design without Rational Expectations By Giacomo Rubbini
  14. Pay Transparency in Organizations By Amir Habibi
  15. Hail Mary Pass: Contests with Stochastic Progress By Chang Liu
  16. Utilitarian Theorems and Equivalence of Utility Theories By Yuhki Hosoya
  17. Why firms should care for consumers: Complementary goods By Ohnishi, Kazuhiro

  1. By: Amir Habibi (HU Berlin)
    Abstract: I study a cheap talk model between a buyer and a seller with two goods for sale. There is two-sided (independent) private information with sequential, two-way communication. In the first stage, the buyer communicates her private preferences to the seller. In the second stage, the seller communicates the quality of the goods to the buyer. When the buyer’s preference is about which attribute common to both goods she prefers, the seller strictly benefits from the buyer communicating her preferences. Whereas when the buyer’s preference is about which good she prefers, this is never the case.
    Keywords: cheap talk; strategic communication; product recommendations;
    JEL: D82 L15
    Date: 2023–05–10
  2. By: Mark Whitmeyer
    Abstract: A sender with state-independent preferences (i.e., transparent motives) privately observes a signal about the state of the world before sending a message to a receiver, who subsequently takes an action. Regardless of whether the receiver can mediate--and commit to a garbling of the sender's message--or delegate--commit to a stochastic decision rule as a function of the message--and understanding the statement ``the receiver is better off as a result of an improvement of the sender's information'' to mean that her maximal and minimal equilibrium payoffs (weakly) increase as the sender's signal improves (in a Blackwell sense), we find that if the sender is more informed, the receiver is better off.
    Date: 2023–03
  3. By: Paul Belleflamme; Martin Peitz
    Abstract: A monopolist selling a network good to heterogeneous users is shown to become a twosided platform if it can condition prices on some user characteristics or if it cannot but induces user self-selection by offering screening contracts. This shows that the availability of sophisticated pricing instruments is essential to make a platform two-sided, not the ability to distinguish separate user groups. The use of freemium strategies (which consists of offering a base version at zero price and a premium version at a positive price) emerges as a special case of versioning.
    Keywords: Network goods, two-sided platforms, platform pricing, group pricing, versioning, freemium
    JEL: D21 D42 L12 L14
    Date: 2023–03
  4. By: Daniel M A Barreto (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique); Alexis Ghersengorin (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, 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); Victor Augias (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Consumer data can be used to sort consumers into different market segments, allowing a monopolist to charge different prices at each segment. We study consumer-optimal segmentations with redistributive concerns, i.e., that prioritize poorer consumers. Such segmentations are efficient but may grant additional profits to the monopolist, compared to consumer-optimal segmentations with no redistributive concerns. We characterize the markets for which this is the case and provide a procedure for constructing optimal segmentations given a strong redistributive motive. For the remaining markets, we show that the optimal segmentation is surprisingly simple: it generates one segment with a discount price and one segment with the same price that would be charged if there were no segmentation.
    Keywords: Third-degree price discrimination, Information design, Redistribution, Inequality, Welfare
    Date: 2022–11–11
  5. By: Barelli, Paulo (U of Rochester); Govindan, Srihari (U of Rochester); Wilson, Robert (Stanford U)
    Abstract: We study an economy with traders whose payoffs are quasilinear and their private signals are informative about an unobserved state parameter. The limit economy has infinitely many traders partitioned into a finite set of symmetry classes called types. It has a unique rational expectations Walrasian equilibrium (REE) whose price reveals the state. Total monotonicity, a property that limits heterogeneity across types, determines whether an efficient social choice function (SCF) is attainable using mechanisms in a class that includes auctions. An average crossing property on the primitives is a sufficient condition for total monotonicity. The REE is an efficient SCF so it is attainable by an auction if and only if it satisfies total monotonicity. REE with total monotonicity is not only attainable, but also implementable: it is approximated by the equilibrium outcomes of auctions with finitely many traders of each type and fine grids of the state, signals and bids.
    JEL: C7 D44 D82
    Date: 2022–08
  6. By: Victor Augias (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique); Daniel M A Barreto (Département d'économie - UPP - Université Pascal Paoli)
    Abstract: We analyze a model of persuasion in which Receiver forms wishful non-Bayesian beliefs. The effectiveness of persuasion depends on Receiver's material stakes: it is more effective when intended to encourage risky behavior that potentially lead to a high payoff and less effective when intended to encourage more cautious behavior. We illustrate this insight with applications showing why informational interventions are often ineffective in inducing greater investment in preventive health treatments, how financial advisors might take advantage of their clients overoptimistic beliefs and why strategic information disclosure to voters with different partisan preferences can lead to belief polarization in an electorate.
    Keywords: Non-Bayesian persuasion, Motivated thinking, Overoptimism, Optimal beliefs
    Date: 2022–02–15
  7. By: Ceesay, Muhammed
    Abstract: When collusion is analyzed for Independent private value auctions, it is implicitly assumed that ring presence is commonly known to colluding and non-colluding bidders. We drop this assumption and analyze a simple model of a first price Independent Private Value auction with uniformly distributed values where a single bidder knows privately of the existence of collusion by others. We show that this knowledge leads him to bid shading (weakly) in the first price auction compared to what he would have bid otherwise. This in turn yields the result that the second price auction dominates the first price auction in terms of seller revenue. This contrasts results from the literature showing that under our framework, when bidding is done while the presence of colluding bidders is common knowledge, the first price auction dominates the second price auction.
    Keywords: Almost-All-Inclusive-Ring, Informational Structures
    JEL: D44
    Date: 2023
  8. By: Hlafo Alfie Mimun; Matteo Quattropani; Marco Scarsini
    Abstract: We consider finite two-player normal form games with random payoffs. Player A's payoffs are i.i.d. from a uniform distribution. Given p in [0, 1], for any action profile, player B's payoff coincides with player A's payoff with probability p and is i.i.d. from the same uniform distribution with probability 1-p. This model interpolates the model of i.i.d. random payoff used in most of the literature and the model of random potential games. First we study the number of pure Nash equilibria in the above class of games. Then we show that, for any positive p, asymptotically in the number of available actions, best response dynamics reaches a pure Nash equilibrium with high probability.
    Date: 2022–09
  9. By: Daron Acemoglu; Asuman Ozdaglar; Sarath Pattathil
    Abstract: Adaptation to dynamic conditions requires a certain degree of diversity. If all agents take the best current action, learning that the underlying state has changed and behavior should adapt will be slower. Diversity is harder to maintain when there is fast communication between agents, because they tend to find out and pursue the best action rapidly. We explore these issues using a model of (Bayesian) learning over a social network. Agents learn rapidly from and may also have incentives to coordinate with others to whom they are connected via strong links. We show, however, that when the underlying environment changes sufficiently rapidly, any network consisting of just strong links will do only a little better than random choice in the long run. In contrast, networks combining strong and weak links, whereby the latter type of links transmit information only slowly, can achieve much higher long-run average payoffs. The best social networks are those that combine a large fraction of agents into a strongly-connected component, while still maintaining a sufficient number of smaller communities that make diverse choices and communicate with this component via weak links.
    JEL: D83 D85
    Date: 2023–05
  10. By: J. Aislinn Bohren (University of Pennsylvania); Daniel N. Hauser (Aalto University and Helsinki GSE)
    Abstract: We link two approaches to biased belief formation: non-Bayesian updating rules and model misspecification. Each approach has advantages: updating rules transparently capture the underlying bias and are identifiable from belief data; misspecified models are `complete' and amenable to general analysis. We show that misspecified models can be decomposed into an updating rule and forecast of anticipated future beliefs. We derive necessary and sufficient conditions for an updating rule and forecast to have a misspecified model representation, show the representation is unique, and construct it. This highlights the belief restrictions implicit in the misspecified model approach. Finally, we explore two ways to elect forecasts introspection-proof and naive consistent and derive when a representation of each exists.
    Keywords: Model misspeci cation, belief formation, learning, non-Bayesian updating, heuristics
    Date: 2023–05–18
  11. By: Masuyama, Ryo
    Abstract: This study analyzes a model in which two firms, one with profiling technology and one without, compete for old and new markets. In the old market, consumers leave their personal information online, whereas, in the new market, consumers do not. When a firm with profiling technology observes consumers' personal information, it sets personalized prices for them. Additionally, consumers can conceal their personal information by paying privacy costs. We introduce heterogeneity in price sensitivities among consumers into our model. We obtain the following result. For greater heterogeneity in price sensitivities, consumer and total surpluses are maximized with no privacy cost; for lower heterogeneity, a sufficiently high privacy cost is desirable for consumers and society; for intermediate heterogeneity, while consumers prefer no privacy cost, total surplus is maximized at a sufficiently high privacy cost. Therefore, when deciding on privacy policy, authorities should consider the heterogeneity in price sensitivities.
    Keywords: personalized pricing; privacy; personal information; heterogeneous consumers; Hotelling model
    JEL: D43 L10 L13
    Date: 2023–05–14
  12. By: Margaret Loudermilk; Gloria Sheu; Charles Taragin
    Abstract: We study the welfare impacts of mergers in markets where some firms are already vertically integrated. Our model features logit Bertrand competition downstream and Nash Bargaining upstream. We numerically simulate four merger types: vertical mergers between an unintegrated retailer and an unintegrated wholesaler, downstream "horizontal" mergers between an unintegrated retailer and an integrated retailer/wholesaler, upstream "horizontal" mergers between an unintegrated wholesaler and an integrated retailer/wholesaler, and integrated mergers between two integrated retailer/wholesaler pairs. We find that mergers that have both horizontal and vertical characteristics typically harm consumers. We apply the model to the Republic/Santek merger as a real-world example.
    Keywords: Bargaining models; Merger simulation; Vertical markets; Vertical mergers
    JEL: L13 L40 L41 L42
    Date: 2023–01–18
  13. By: Giacomo Rubbini
    Abstract: Does dropping the rational expectations assumption mean the social planner can implement a larger class of social choice rules? This paper proposes a generalized model of implementation that does not assume rational expectations and characterizes the class of solution concepts requiring Bayesian Incentive Compatibility for full implementation. Surprisingly, full implementation of social choice functions turns out not to be significantly more permissive than with rational expectations. This implies some classical results, such as the impossibility of efficient bilateral trade (Myerson and Satterthwaite, 1983) hold for a broad range of non-equilibrium solution concepts, confirming their relevance even in boundedly rational setups.
    Date: 2023–05
  14. By: Amir Habibi (HU Berlin)
    Abstract: I study when a firm prefers to be transparent about pay using a simple multidimensional signaling model. Pay transparency within the firm means that a worker can learn about his own worker-firm match from another worker’s pay. This can either encourage or discourage workers—which affects retention—and so creates a trade-off for the firm when it commits to a level of transparency. The model pre- dicts that when few workers have a high worker-firm match, transparency is always preferred by the firm and becomes more favorable as the value of retaining these ‘star’ workers increases. This prediction is consistent with the firms in the field that choose to be internally transparent about pay. The model also predicts that transparency leads to pay compression, again consistent with evidence from the field.
    Keywords: pay transparency; bonus pay; multidimensional signaling; relative pay;
    JEL: D82 D86 J30 M52
    Date: 2023–05–10
  15. By: Chang Liu
    Abstract: This paper studies the equilibrium behavior in contests with stochastic progress. Participants have access to a safe action that makes progress deterministically, but they can also take risky moves that stochastically influence their progress towards the goal and thus their relative position. In the unique well-behaved Markov perfect equilibrium of this dynamic contest, the follower drops out if the leader establishes a substantial lead, but resorts to "Hail Marys" beforehand: no matter how low the return of the risky move is, the follower undertakes in an attempt to catch up. Moreover, if the risky move has a medium return (between high and low), the leader will also adopt it when the follower is close to dropping out - an interesting preemptive motive. We also examine the impact of such equilibrium behavior on the optimal prize allocation.
    Date: 2023–05
  16. By: Yuhki Hosoya
    Abstract: In this paper, we consider an environment in which the utilitarian theorem for the NM utility function derived by Harsanyi and the utilitarian theorem for Alt's utility function derived by Harvey hold simultaneously, and prove that the NM utility function coincides with Alt's utility function under this setup. This result is so paradoxical that we must presume that at least one of the utilitarian theorems contains a strong assumption. We examine the assumptions one by one and conclude that one of Harsanyi's axioms is strong.
    Date: 2023–04
  17. By: Ohnishi, Kazuhiro
    Abstract: Corporate social responsibility (CSR) is a business approach that cares about social and environmental issues, and customer orientation (CO) is a business strategy that centres on the needs and wishes of customers in all decision-making. This paper examines two games of Cournot duopoly where two profit-maximizing firms produce complementary goods. The first game is that both firms consider the surplus of all consumers (CSR) as corporate culture, and the second game is that both firms care only for their own customers (CO). This paper presents the respective optimal levels of CSR and CO. Furthermore, the paper shows that all the profits in these optimal levels are equal.
    Keywords: Complementary goods; Consumer surplus; Cournot model; Customer surplus
    JEL: C72 D21
    Date: 2023–05–12

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