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on Microeconomics |
| By: | Dirk Bergemann (Yale University); Benjamin Brooks (University of Chicago); Stephen Morris (Massachusetts Institute of Technology) |
| Abstract: | Producers of heterogeneous goods with heterogeneous costs compete in prices. When producers know their own production costs and the consumer knows their values, consumer surplus and total surplus are aligned: the information structure and equilibrium that maximize consumer surplus also maximize total surplus. We report when alignment extends to the case where either the consumer is uncertain about their own values or producers are uncertain about their own costs, and we also give examples showing when it does not. Less information for either producers or consumer may intensify competition in a way that benefits the consumer but results in inefficient production. We also characterize the information for consumer and producers that maximizes consumer surplus in a Hotelling duopoly. |
| Date: | 2024–05–29 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2373r1&r= |
| By: | Vives, Xavier; Vravosinos, Orestis |
| Abstract: | We examine the effects of overlapping ownership among existing firms deciding whether to enter a product market. We show that in most cases—and especially when overlapping ownership is already widespread, an increase in the extent of overlapping ownership will harm welfare by softening product market competition, reducing entry, thereby (in contrast to standard results) inducing insufficient entry, and magnifying the negative impact of an increase of entry costs on entry. Overlap-ping ownership can mostly be beneficial only under substantial increasing returns to scale, in which case industry consolidation (induced by overlapping ownership) leads to sizable cost efficiencies. |
| JEL: | D43 L11 L13 L21 L41 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129418&r= |
| By: | Gregorio Curello |
| Abstract: | We study decision problems under uncertainty involving the choice of a rule mapping states into actions. We show that for any rule, there exists an increasing rule generating higher expected value for all payoff functions that are supermodular in action and state. We present applications to problems of taxation, betting, and price-discrimination in markets with demand externalities. We then consider rules mapping noisy signals of the state into actions. Under some conditions, optimal rules are increasing when (a) several agents are constrained to choose a single rule or (b) the relationship between signal and state is ambiguous. Moreover, standard informativeness criteria apply. |
| Keywords: | monotone comparative statics, rearrangement, optimal taxation, price discrimination, uncertainty, informativeness |
| JEL: | C61 D71 D81 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_567&r= |
| By: | Gregorio Curello |
| Abstract: | Agents exert hidden effort to produce randomly-sized innovations in a technology they share. Returns from using the technology grow as it develops, but so does the opportunity cost of effort, due to an ‘exploration-exploitation’ trade-off. As monitoring is imperfect, there exists a unique (strongly) symmetric equilibrium, and effort in any equilibrium ceases no later than in the single-agent problem. Small innovations may hurt all agents in the symmetric equilibrium, as they severely reduce effort. Allowing agents to discard innovations increases effort and payoffs, preserving uniqueness. Under natural conditions, payoffs rise above those of all equilibria with forced disclosure. |
| Keywords: | dynamic games, imperfect monitoring, public goods, private information |
| JEL: | C73 D82 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_566&r= |
| By: | Gregorio Curello; Ludvig Sinander |
| Abstract: | In the canonical persuasion model, comparative statics has been an open question. We answer it, delineating which shifts of the sender's interim payoff lead her optimally to choose a more informative signal. Our first theorem identifies a coarse notion of 'increased convexity' that we show characterises those shifts of the senders interim payoff that lead her optimally to choose no less informative signals. To strengthen this conclusion to 'more informative' requires further assumptions: our second theorem identifies the necessary and sufficient condition on the sender's interim payoff, which strictly generalises the 'S' shape commonly imposed in the literature. We identify conditions under which increased alignment of interests between sender and receiver lead to comparative statics, and study a number of applications. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_564&r= |
| By: | Marek Kapera |
| Abstract: | In this article I study whether the interim preferences of the consumer can be expected to converge to their real preferences in the process of preference discovery. I construct a subjective expected utility model of the consumer, where the uncertainty results from the imperfect knowledge of their own preferences. This uncertainty is partially resolved by experimental consumption. Under the assumption that the subjective probability of the consumer satisfies learning monotonicity, I identify the equivalent conditions for the consumer to experiment. My results show that the interim preferences never fully converge to the real preferences of the consumer. Instead, the preference discovery either terminates, meaning that the consumer ceases to experiment, or only experiments within some neighborhood of the best currently known alternative, and never sufficiently explores their preferences. |
| Keywords: | Taste uncertainty, Preference discovery, Learning through consumption, Conditional preferences, Experimental preferences |
| JEL: | D11 D83 D91 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2024098&r= |
| By: | Aytimur, R. Emre; Suen, Richard M. H. |
| Abstract: | How does the quality of information received by voters affect political polarisation? We address this long-standing question using an election competition model in which voters have to infer an unknown state from some noisy and biased signals. Their policy preferences are shaped by the posterior belief, which is unknown to the parties when they choose their platforms. The greater the uncertainty faced by the parties, the greater the incentive to polarise. We show that better information can either promote or suppress polarisation, depending on the gap between voters' and politicians' beliefs (disagreement). We also examine the welfare implications of polarisation. |
| Keywords: | Polarisation, Voter Information, Bayesian Learning, Election |
| JEL: | D72 D80 |
| Date: | 2024–05–17 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121112&r= |
| By: | Gregorio Curello; Ludvig Sinander |
| Abstract: | We identify a new dynamic agency problem: that of incentivising the prompt disclosure of productive information. To study it, we introduce a general model in which a technological breakthrough occurs at an uncertain time and is privately observed by an agent, and a principal must incentivise disclosure via her control of a payoff-relevant physical allocation. We uncover a deadline structure of optimal mechanisms: they have a simple deadline form in an important special case, and a graduated deadline structure in general. We apply our results to the design of unemployment insurance schemes. |
| Keywords: | Incentive design, delegation, verifiable evidence |
| JEL: | D82 D86 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_562&r= |
| By: | Yingkai Li; Boli Xu |
| Abstract: | A principal can propose a project to an agent, who then decides whether to accept. Their payoffs from launching the project depend on an unknown binary state. The principal can obtain more precise information about the state through a test at no cost, but crucially, it is common knowledge that she can falsify the test result. In the most interesting case where players have conflicted interests, the optimal test is a binary lemon-detecting test. We also find that coordination is possible when the principal is pessimistic but not when the agent is pessimistic. Moreover, when the agent has private information about the state, a single binary lemon-detecting test remains optimal even though the principal has the option to screen the agent by providing a menu of tests. Our finding is consistent with observed tests in real practice. |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2405.18521&r= |
| By: | Emanuele Bacchiega (Department of Computer Science and Engineering, University of Bologna, Italy); Elias Carroni (Department of Economics, University of Bologna, Italy); Alessandro Fedele (Faculty of Economics and Management, Free University of Bozen-Bolzano, Italy) |
| Abstract: | The Hotelling model is the workhorse for analyzing platform competition in two-sided markets. In this setup, the degree of platform differentiation must be high relative to cross-group benefits to eschew the alleged non-existence of Nash equilibria. The present paper shows instead that Nash equilibria exist even for relatively low differentiation; at such equilibria, platforms avoid competition by replicating a collusive outcome. This result widens our knowledge of the two-sided Hotelling model and is relevant for a large array of markets --especially digital ones-- where platforms operate in relatively low-differentiation environments. |
| Keywords: | Hotelling model; Platform competition; Two-sided markets; Equilibrium existence. |
| JEL: | L13 C72 D21 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bzn:wpaper:bemps106&r= |
| By: | Foerster, Manuel; Hellmann, Tim; Vega-Redondo, Fernando |
| Abstract: | We set out a model of social media influencer marketing in which a firmmay hire influencers to inform consumers about an innovation. Influencersgenerate sales through purchases of their followers and followers' social networks and set prices for their endorsements. In turn, the firm decides whichinfluencers to hire, which story to convey via the influencers, and sets the retail price of the innovation. In equilibrium, influencers price according totheir marginal contribution to industry profits and increase consumers' willingnessto pay with their stories. In particular, under a weak condition itis the influencers with the most reactive followers who are hired and obtainpositive profits in equilibrium. Finally, we show that the firm may be betteroff if it could commit to hire fewer influencers. |
| Keywords: | Strategic Product Marketing; Social Media Influencer; Innovation; Social Networks; Bertrand Competition. |
| Date: | 2024–06–17 |
| URL: | https://d.repec.org/n?u=RePEc:cte:werepe:43985&r= |
| By: | Roy Long |
| Abstract: | The game theoretic concepts of rationalizability and iterated dominance are closely related and provide characterizations of each other. Indeed, the equivalence between them implies that in a two player finite game, the remaining set of actions available to players after iterated elimination of strictly dominated strategies coincides with the rationalizable actions. I prove a dimensionality result following from these ideas. I show that for two player games, the number of actions available to the opposing player provides a (tight) upper bound on how a player's pure strategies may be strictly dominated by mixed strategies. I provide two different frameworks and interpretations of dominance to prove this result, and in doing so relate it to Radon's Theorem and Carath\'eodory's Theorem from convex geometry. These approaches may be seen as following from point-line duality. A new proof of the classical equivalence between these solution concepts is also given. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.16050&r= |
| By: | Maija Halonen-Akatwijuka (University of Bristol); Carol Propper (Imperial College London, Monash University, IFS and CEPR) |
| Abstract: | This paper examines the implications of consumer heterogeneity for the choice of competition and monopoly in public services delivery. In a setting with motivated providers who favour one type of service user over another, we show that competition can raise average quality. However, this may be at the expense of the minority type of user if the providers favour the majority type. Then an inequity averse regulator may protect the minority by not introducing competition. Alternatively, if the providers favour the minority type, the regulator may introduce competition to incentivize the providers to pay attention to the less rewarding majority type. |
| Keywords: | Public services, Competition, Quality, Inequity aversion |
| JEL: | H11 I11 I14 I24 L31 |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:mhe:chemon:2024-03&r= |
| By: | Gilli, Mario; Sorrentino, Andrea |
| Abstract: | In this paper we consider a deterministic complete information two groups contest where the effort choices made by the teammates are aggregated into group performance by the weakest-link technology (perfect complementarity), that is a “max-min group contest”, as defined by Chowdhury et al. (2016). However, instead of a continuum effort set, we employ a binary action set. Further, we consider private good prizes, so that there is a sharing issue within the winning group. Therefore, we include two stages: the first one about the setting of a sharing rule parameter and the second one about simultaneous and independent actions’ choices. The binary action set allow us to innovate on the existing literature by (i) characterizing the full set of the second stage equilibrium actions; (ii) computationally characterizing in MATLAB the set of within-group symmetric subgame perfect Nash equilibria in pure strategies in the entire game. We find conditions such that the set of within-group symmetric subgame perfect Nash equilibria in pure strategies have the cardinality of the continuum. We also check whether this paper’s results are due to discreteness or to binary choice, proving that in this case there are no subgame perfect Nash equilibria in pure strategies, as proved in the continuum case in Gilli and Sorrentino (2024). |
| Keywords: | Public Economics |
| Date: | 2024–06–12 |
| URL: | https://d.repec.org/n?u=RePEc:ags:feemwp:343494&r= |
| By: | Gregorio Curello; Ludvig Sinander |
| Abstract: | Most comparisons of preferences are instances of single-crossing dominance. We examine the lattice structure of single-crossing dominance, proving characterisation, existence and uniqueness results for minimum upper bounds of arbitrary sets of preferences. We apply these theorems to derive new comparative statics theorems for collective choice and under analyst uncertainty, to characterise a general 'maxmin' class of uncertainty-averse preferences over Savage acts, and to revisit the tension between liberalism and Pareto efficiency in social choice. |
| Keywords: | preference, lattice, comparative statics, risk-aversion, ambiguity, crown, diamond |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_563&r= |
| By: | Allmis, Patrick; Pin, Paolo; Vega-Redondo, Fernando |
| Abstract: | We propose a simple micro-founded model of trading with ex-ante asymmetric information similar to one proposed by Kyle (1985) in which the equilibrium price is fully revealing under rational expectations. We analyze under which conditions a privately informed trader may want to share her information with other traders for free. Despite the strictly competitive setupand conventional wisdom, we show that there is a unique separating equilibrium in which the informed trader reveals some signals and conceals others. A consequence of this is that the price need not be fully revealing of the aggregate information in the market (even if traders are risk neutral), which in turn has welfare implications on the distribution of the social surplusat equilibrium. We establish these results for a context where the pattern of communication among traders is restricted by a given social network, studying as well what network arises when links are established endogenously. |
| Keywords: | Information Sharing; Market Efficiency; Financial Markets; Information Aggregation; Communication Network; Network Formation |
| Date: | 2024–06–10 |
| URL: | https://d.repec.org/n?u=RePEc:cte:werepe:43966&r= |
| By: | Alireza Fallah; Michael I. Jordan; Annie Ulichney |
| Abstract: | We consider a dynamic mechanism design problem where an auctioneer sells an indivisible good to two groups of buyers in every round, for a total of $T$ rounds. The auctioneer aims to maximize their discounted overall revenue while adhering to a fairness constraint that guarantees a minimum average allocation for each group. We begin by studying the static case ($T=1$) and establish that the optimal mechanism involves two types of subsidization: one that increases the overall probability of allocation to all buyers, and another that favors the group which otherwise has a lower probability of winning the item. We then extend our results to the dynamic case by characterizing a set of recursive functions that determine the optimal allocation and payments in each round. Notably, our results establish that in the dynamic case, the seller, on the one hand, commits to a participation reward to incentivize truth-telling, and on the other hand, charges an entry fee for every round. Moreover, the optimal allocation once more involves subsidization in favor of one group, where the extent of subsidization depends on the difference in future utilities for both the seller and buyers when allocating the item to one group versus the other. Finally, we present an approximation scheme to solve the recursive equations and determine an approximately optimal and fair allocation efficiently. |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.00147&r= |
| By: | Andrea Collevecchio; Tuan-Minh Nguyen; Ziwen Zhong |
| Abstract: | Best Response Dynamics (BRD) is a class of strategy updating rules to find Pure Nash Equilibria (PNE) in a game. At each step, a player is randomly picked and they switches to a "best response" strategy based on the strategies chosen by others, so that the new strategy profile maximises their payoff. If no such strategy exists, a different player will be chosen randomly. When no player wants to change their strategy anymore, the process reaches a PNE and will not deviate from it. On the other hand, either PNE could not exist, or BRD could be "trapped" within a subgame that has no PNE. We prove that BRD typically converges to PNE when the game has $N$ players, each having two actions. Our results are more general and are described as follows. We study a class of random walks in a random medium on the $N$-dimensional hypercube. The medium is determined by a random game with $N$ players, each with two actions available, and i.i.d. payoffs. The medium contains obstacles that can be of two types. The first type is composed of the PNE of the game, while the other obstacles are known in the literature as traps or sink equilibria. The class of processes we analyze includes BRD, simple random walks on the hypercube, and many other nearest neighbour processes. We prove that, with high probability, these processes reach a PNE before hitting any trap. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.09732&r= |
| By: | Subhasish M. Chowdhury (Department of Economics, University of Sheffield, Sheffield S1 4DT, UK); Iryna Topolyan (Department of Economics, University of Cincinnati, Cincinnati, OH 45221, USA) |
| Abstract: | We analyze a general equilibrium model of attack and defense with production and conflict. One attacker and one defender allocate their fixed endowments either to produce gun or to produce butter, and the volume of guns produced determines the winner in the conflict. If the attacker wins, then it appropriates all the butter produced in the economy; otherwise, each consume only their own butter. We characterize the unique interior and unique corner equilibrium for this game. We find that (i) the defender may spend more resources on conflict than the attacker even without loss aversion or other behavioral biases, (ii) the attacker may expend all their resources only in conflict, and (iii) the interior and the corner equilibria cannot coexist. |
| Keywords: | Conflict; Production; Gun and Butter; Attack and Defense |
| JEL: | C72 D74 D23 Q34 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:shf:wpaper:2024003&r= |
| By: | Tsuritani, Ryosuke |
| Abstract: | Price discrimination has substantial social and policy implications and has received attention in the literature. However, prior research on input price discrimination has largely been limited to single-input situations. We explore the strategic desirability of uniform pricing, fill gaps in the prior literature regarding the “nondiscriminatory” aspect of input price discrimination, and contribute to the growing literature on perfectly complementary inputs in ver- tical markets. This study considers a vertically related market in which two symmetric upstream firms provide perfectly complementary inputs for two downstream manufacturers, one of which has a non-controlling interest in its rival. Each upstream firm can choose between two pricing regimes: discrim- inatory or uniform. This study shows that, although uniform pricing limits pricing flexibility, one upstream firm voluntarily chooses uniform pricing, and the other chooses discriminatory pricing in equilibrium. To our knowledge, this study is the first to demonstrate such an asymmetric pricing equilibrium. Furthermore, our findings have implications for policymakers deciding whether to prohibit discriminatory pricing. |
| Keywords: | uniform price; input price discrimination; complementary inputs; hori- zontal shareholding; self-regulation |
| JEL: | D43 G34 L11 L40 |
| Date: | 2023–10–26 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121176&r= |
| By: | Lionel De Boisdeffre (Université Paris 1 Panthéon-Sorbonne, Centre d'Economie de la Sorbonne) |
| Abstract: | The paper presents a pure exchange economy, where consumers may have asymmetric information, non-ordered preferences and a restricted access to purely financial markets. Under standard conditions, it shows that the two concepts of no-arbitrage price and equilibrium asset price coincide. Namely, any collection of state prices in realizable states is proved to support a sequential equilibrium. This result extends Cass (2006), De Boisdeffre (2007) and similar results of symmetric information, such as Martins-da-Rocha and Triki's (2005) or Cornet and Gopalan's (2010). Moreover, the definition and existence of the sequential equilibrium do not rely on Radner's (1972, 1979) rational expectation assumptions, which may be dropped |
| Keywords: | incomplete markets; restricted participation; arbitrage; existence of equilibrium; rational expectations; perfect foresight; asymmetric information |
| JEL: | D52 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:mse:cesdoc:24005&r= |
| By: | Peter Doe |
| Abstract: | We provide a framework to unify classic models of two-sided matching with recent models of recontracting. In the classic model, agents from two sides must be matched; in models of recontracting, agents improve a status quo match. We generalize the core (matches not blocked by any coalition) from cooperative game theory to our setting by restricting the set of permissible coalitions to coalitions containing neither or both agents in a status quo match, dubbed "agreeable" coalitions. The agreeable core is the set of all weak improvements of the status quo that are not blocked by any agreeable coalition. Our main result is that the agreeable core is nonempty and can be found through a computationally efficient and economically meaningful algorithm: our Propose-Exchange algorithm. The applications of the agreeable core include early decision, out-of-match agreements in the NRMP, matching with minimum constraints, and efficiency in school choice. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.08700&r= |
| By: | Alastair Langtry; Sarah Taylor; Yifan Zhang |
| Abstract: | This paper studies the general class of games where agents: (1) are embedded on a network, (2) have two possible actions, and (3) these actions are strategic complements. We use a measure of network cohesiveness -- the k-core -- to provide a novel characterisation of the equilibria. After transforming the network appropriately, the k-core fully describes both the minimal and maximal equilibria, and also provides a partial characterisation of all others. This framework is also the binary action version of the large class of network games with strategic complements and continuous actions. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.04540&r= |
| By: | Jiarui Xie |
| Abstract: | We study a multi-stage admission system, known as the Tiered Deferred Acceptance mechanism, designed to benefit some schools over others. The current US public school and Chinese college admission systems are two examples. In this system, schools are partitioned into tiers, and the Deferred Acceptance algorithm is applied within each tier. Once assigned, students cannot apply to schools in subsequent tiers. This mechanism is not strategyproof. Therefore, we study the Nash equilibria of the induced preference revelation game. We show that Nash equilibrium outcomes are nested in the sense that merging tiers preserves all equilibrium outcomes. We also identify within-tier acyclicity as a necessary and sufficient condition for the mechanism to implement stable matchings in equilibrium. Our findings suggest that transitioning from the Deferred Acceptance mechanism to the Tiered Deferred Acceptance mechanism may not improve student quality at top-tier schools as intended. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.00455&r= |
| By: | Ascensión Andina-Díaz (Departamento de Teoría e Historia Económica, Universidad de Málaga); José A. García-Martínez (Dpto. Estudios Económicos y Financieros, Universidad Miguel Hernández); Nektaria Glynia (Dep. Economics, University of Cyprus) |
| Abstract: | We analyze the effect of career concerns on the refereeing process. We consider a journal editor and two referees who may differ in reputation and ability. A referee’s reputation is public information, while a referee’s ability is private information. We identify an incentive for low-ability referees to reject good papers —a phenomenon we call over-rejection— and find that this incentive increases with the referee’s reputation. We show that over-rejection decreases with competition, referee homogeneity, and the anonymity of the refereeing process. In contrast to low-ability experts, high-ability referees are truthful in equilibrium. Since a referee with a higher reputation is ex-ante more likely to be high-ability, our results suggest that the probability of rejection is inverted U-shaped in the referee’s reputation. We empirically test this result. We use data from Card and DellaVigna (2020) for submissions to four top economic journals in the period 2003-2013 and use the referee’s publication record as a proxy for the referee’s reputation. We find that the probability of sending a negative recommendation increases with the referee’s reputation in the early stages of the career and decreases thereafter, suggesting an inverted U-shape form in line with our theoretical results. |
| Keywords: | Career concerns: refereeing process; reputation; ability; endogenous transparency; competition; information transmission. |
| JEL: | C72 D83 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:mal:wpaper:2024-3&r= |
| By: | Francesco Fabbri; Giulio Principi; Lorenzo Stanca |
| Abstract: | We represent preferences that exhibit absolute or relative attitudes towards ambiguity without assuming convexity of preferences. Our analysis is motivated by the recent experimental evidence by Baillon and Placido (2019) indicating that ambiguity becomes more tolerable as individuals are better off overall. Decreasing absolute ambiguity aversion is characterized by constant superadditive certainty equivalents and admits an act-dependent variational representation (Maccheroni et al., 2006). Decreasing relative ambiguity aversion relates to positive superhomogeneity and admits an act-dependent confidence preference representation (Chateauneuf and Faro, 2009). We apply our characterizations to retrieve a classic risk sharing result on the efficiency of trade and subjective beliefs of the individuals (Rigotti et al., 2008). |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.01343&r= |