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on Microeconomics |
| By: | Patrick Rey; Yossi Spiegel; Konrad O. Stahl |
| Abstract: | We study the feasibility and profitability of predation in a dynamic environment, using a parsimonious infinite-horizon, complete information setting in which an incumbent repeatedly faces potential entry. When a rival enters, the incumbent chooses whether to accommodate or predate it; the entrant then decides whether to stay or exit. We show that there always exists a Markov perfect equilibrium, which can be of three types: accommodation, monopolization, and recurrent predation. We then analyze and compare the welfare effects of different antitrust policies, accounting for the possibility that recurrent predation may be welfare improving. |
| Keywords: | predation, accommodation, entry, legal rules, Markov perfect equilibrium |
| JEL: | D43 L41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11172&r= |
| By: | Atulya Jain; Vianney Perchet |
| Abstract: | How should an expert send forecasts to maximize her utility subject to passing a calibration test? We consider a dynamic game where an expert sends probabilistic forecasts to a decision maker. The decision maker uses a calibration test based on past outcomes to verify the expert's forecasts. We characterize the optimal forecasting strategy by reducing the dynamic game to a static persuasion problem. A distribution of forecasts is implementable by a calibrated strategy if and only if it is a mean-preserving contraction of the distribution of conditionals (honest forecasts). We characterize the value of information by comparing what an informed and uninformed expert can attain. Moreover, we consider a decision maker who uses regret minimization, instead of the calibration test, to take actions. We show that the expert can achieve the same payoff against a regret minimizer as under the calibration test, and in some instances, she can achieve strictly more. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.15680&r= |
| By: | Jeremias Lenzi |
| Abstract: | Voting mechanisms are widely accepted and used methods for decentralized decision-making. Ensuring the acceptance of the voting mechanism's outcome is a crucial characteristic of robust voting systems. Consider this scenario: A group of individuals wants to choose an option from a set of alternatives without requiring an identification or proof-of-personhood system. Moreover, they want to implement utilitarianism as their selection criteria. In such a case, players could submit votes multiple times using dummy accounts, commonly known as a Sybil attack (SA), which presents a challenge for decentralized organizations. Is there a voting mechanism that always prevents players from benefiting by casting votes multiple times (SA-proof) while also selecting the alternative that maximizes the added valuations of all players (efficient)? One-person-one-vote is neither SA-proof nor efficient. Coin voting is SA-proof but not efficient. Quadratic voting is efficient but not SA-proof. This study uses Bayesian mechanism design to propose a solution. The mechanism's structure is as follows: Players make wealth deposits to indicate the strength of their preference for each alternative. Each player then receives an amount based on their deposit and the voting outcome. The proposed mechanism relies on two main concepts: 1) Transfers are influenced by the outcome in a way that each player's optimal action depends only on individual preferences and the number of alternatives; 2) A player who votes through multiple accounts slightly reduces the expected utility of all players more than the individual benefit gained. This study demonstrates that if players are risk-neutral and each player has private information about their preferences and beliefs, then the mechanism is SA-proof and efficient. This research provides new insights into the design of more robust decentralized decision-making mechanisms. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.01844&r= |
| By: | Toraubally, Waseem A. (Newcastle Business School) |
| Abstract: | We augment the Shapley–Shubik (1977) market game to include a spatial dimension à la Hotelling (1929). Taking firms’ locations as given, we study and characterise, through several propositions, lemmata, and a theorem, the main equilibrium predictions of this new model. When both firms locate in the centre and there is no product differentiation at all, we derive a counterexample in which both firms charge a price that is greater than marginal cost. Intriguingly, we show that even when both firms are in the same location, it is possible for the Law of One Price (LOOP) to fail, i.e., the exact same good sells at different prices across two platforms that are a priori identical. We derive similar (equal- and unequal-price) counterexamples in the context where the firms locate at the extreme ends of the city. Now, it is well known that in the traditional Hotelling model, a pure-strategy Nash equilibrium (PSNE) fails to exist when the two firms are closely spaced and near the centre of the city. In our main result, we allow the firms to be arbitrarily close to each other, and propose two counterexamples in which a PSNE exists. In one, the LOOP holds, while in the other, it fails. |
| Keywords: | Spatial Cournot oligopoly ; Existence of pure-strategy equilibrium with closely spaced firms ; Failure of Law of One Price ; Strategic behaviour with a continuum of players |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:wcreta:87&r= |
| By: | Andrew Koh; Sivakorn Sanguanmoo; Weijie Zhong |
| Abstract: | We provide a unified analysis of how dynamic information should be designed in optimal stopping problems: a principal controls the flow of information about a payoff relevant state to persuade an agent to stop at the right time, in the right state, and choose the right action. We further show that for arbitrary preferences, intertemporal commitment is unnecessary: optimal dynamic information designs can always be made revision-proof. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.12278&r= |
| By: | Yuan Gu; Chao Hung Chan |
| Abstract: | This paper proposes a model of decision-making under uncertainty in which an agent is constrained in her cognitive ability to consider complex acts. We identify the complexity of an act according to the corresponding partition of state space. The agent ranks acts according to the expected utility net of complexity cost. A key feature of this model is that the agent is able to update her complexity cost function after the arrival of new information. The main result characterizes axiomatically an updating rule for complexity cost function, the Minimal Complexity Aversion representation. According to this rule, the agent measures the complexity cost of an act conditional on the new information by using the cost of another act that gives exactly the same partition of the event but with the lowest ex-ante cost. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.18463&r= |
| By: | Jonathan Gehle; Ferdinand A. von Siemens; Ferdinand von Siemens |
| Abstract: | We investigate how heterogeneous social preferences affect the communication of painful information in social relationships. We characterize the existence conditions for a pooling equilibrium in which individuals conceal painful information because revealing the latter would signal that they are selfish, thereby leading to a loss of trust. We also find that compassionate individuals may then be more tempted to reveal bad news than selfish individuals because they benefit less from an intact social relationship. Moreover, there may be multiple equilibria with different degrees of information disclosure and standard equilibrium refinements have no bite. Coordination on an inefficient equilibrium could therefore lead to severe information frictions, even if the pain of receiving bad news is quite small. |
| Keywords: | communication, painful information, social preferences, trust |
| JEL: | D82 D83 D91 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11181&r= |
| By: | Andrea Collevecchio; Hlafo Alfie Mimun; Matteo Quattropani; Marco Scarsini |
| Abstract: | We consider the class of two-person ordinal potential games where each player has the same number of actions $K$. Each game in this class admits at least one pure Nash equilibrium and the best-response dynamics converges to one of these pure Nash equilibria; which one depends on the starting point. So, each pure Nash equilibrium has a basin of attraction. We pick uniformly at random one game from this class and we study the joint distribution of the sizes of the basins of attraction. We provide an asymptotic exact value for the expected basin of attraction of each pure Nash equilibrium, when the number of actions $K$ goes to infinity. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.05460&r= |
| By: | Leonardo Madio; Martin Quinn |
| Abstract: | We study the incentive of an ad-funded social media platform to curb the presence of unsafe content that entails reputational risk to advertisers. We identify conditions for the platform not to moderate unsafe content and demonstrate how the optimal moderation policy depends on the risk the advertisers face. The platform is likely to under-moderate unsafe content relative to the socially desirable level when both advertisers and users have congruent preferences for unsafe content and to over-moderate unsafe content when advertisers have conflicting preferences for unsafe content. Finally, to mitigate negative externalities generated by unsafe content, we study the implications of a policy that mandates binding content moderation to online platforms and how the introduction of taxes on social media activity and social media platform competition can distort the platform’s moderation strategies. |
| Keywords: | advertising, content moderation, social media platforms, toxic content |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11169&r= |
| By: | Mark Whitmeyer |
| Abstract: | We begin by formulating and characterizing a dominance criterion for prize sequences: $x$ dominates $y$ if any impatient agent prefers $x$ to $y$. With this in hand, we define a notion of comparative patience. Alice is more patient than Bob if Alice's normalized discounted utility gain by going from any $y$ to any dominating $x$ is less than Bob's discounted utility gain from such an improvement. We provide a full characterization of this relation in terms of the agents' discount rules. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.02323&r= |
| By: | Brian McFadden |
| Abstract: | A mechanism is described that addresses the fundamental trade off between media producers who want to increase reach and consumers who provide attention based on the rate of utility received, and where overreach negatively impacts that rate. An optimal solution can be achieved when the media source considers the impact of overreach in a cost function used in determining the optimal distribution of content to maximize individual consumer utility and participation. The result is a Nash equilibrium between producer and consumer that is also Pareto efficient. Comparison with the literature on Recommender systems highlights the advantages of the mechanism.The review suggests advancements over that literature including identifying an optimal content volume for the consumer and improvements for handling multiple objectives A practical algorithm to generate the optimal distribution for each consumer is provided. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.16212&r= |
| By: | Navin Kartik; Francesco Squintani; Katrin Tinn |
| Abstract: | Do elections efficiently aggregate politicians' policy-relevant private information? This paper argues that politicians' office motivation is an obstacle. In a two-candidate Hotelling-Downs model in which each candidate has socially-valuable policy information, we establish that equilibrium welfare is at best what can be obtained by disregarding one politician's information. We also find that for canonical information structures, politicians have an incentive to ``anti-pander'', i.e., to overreact to their information. Some degree of pandering -- underreacting to information -- would be socially beneficial. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.17084&r= |
| By: | Lorenz Hartmann (University of Basel); David Kelsey (University of Nottingham) |
| Abstract: | This paper proposes that the ambiguity reflected by a set of priors remains unchanged when the set is translated within the probability simplex, i.e. ambiguity is location invariant. This unifies and generalises numerous influential definitions of ambiguity in the literature. Location invariance is applied to normal form games where players perceive strategic ambiguity. The set of translations of a given set of priors is shown to be isomorphic to the probability simplex. Thus considering mixtures of translations has a convexifying effect similar to considering mixed strategies in the absence of ambiguity. This leads to the proof of equilibrium existence in complete generality using a fixed point theorem. We illustrate the modelling capabilities of our solution concept and demonstrate how our model can intuitively describe strategic interaction under ambiguity. |
| Keywords: | ambiguity; multiple priors; translations; games; equilibrium existence |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:not:notcdx:2024-05&r= |
| By: | Laura Doval; Pablo Schenone |
| Abstract: | We provide a framework to study stability notions for two-sided dynamic matching markets in which matching is one-to-one and irreversible. The framework gives centerstage to the set of matchings an agent anticipates would ensue should they remain unmatched, which we refer to as the agent's conjectures. A collection of conjectures, together with a pairwise stability and individual rationality requirement given the conjectures, defines a solution concept for the economy. We identify a sufficient condition--consistency--for a family of conjectures to lead to a nonempty solution (cf. Hafalir, 2008). As an application, we introduce two families of consistent conjectures and their corresponding solution concepts: continuation-value-respecting dynamic stability, and the extension to dynamic markets of the solution concept in Hafalir (2008), sophisticated dynamic stability. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.04857&r= |
| By: | Varun Bansal |
| Abstract: | In this paper I develop and characterize a random attention model with unobserved reference alternatives. The decision maker pays attention to different subsets of the available set of alternatives randomly. The reference alternatives are exactly those alternatives that are always paid attention to, i.e. they are attention-privileged and these alternatives are supposed to be unknown to the outside observer. The characterization allows for a complete identification of the reference alternatives and a coarse identification of the underlying preferences. I then restrict the model by considering the independent random attention function and provide a complete identification of the underlying preferences as well. JEL Classification: D01, D91, Z13 Keywords: Bounded Rationality, Stochastic Choice, Limited Attention, Consideration Sets |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.01528&r= |
| By: | Christian Ewerhart |
| Abstract: | The n-player Tullock contest with complete information is known to admit explicit solutions in special cases, such as (i) homogeneous valuations, (ii) constant returns, and (iii) two contestants. But can that model be solved more generally? In this paper, we show that key characteristics of the equilibrium, such as individual efforts, winning probabilities, and payoffs cannot, in general, be expressed in terms of the primitives of the model using basic arithmetic operations plus the extraction of roots alone. In this sense, the Tullock contest is intractable. We argue that our formal concept of tractability captures the intuitive understanding of the notion. |
| Keywords: | Tullock contest, pure-strategy Nash equilibrium, solution by radicals, Galois theory |
| JEL: | C02 C72 D72 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:zur:econwp:447&r= |
| By: | Gustavo Bergantiños (ECOBAS, Universidade de Vigo); Christian Trudeau (Department of Economics, University of Windsor) |
| Abstract: | In Alcalde-Ulzu et al. (Journal of Economic Theory, 2022), a novel model to measure the value of a language is developed, and a family of value functions is axiomatically characterized. These functions assign the value of a language by looking at the groups that can communicate with that language. Each group is assigned a fixed value that depends on its size. If a group can communicate in a language, that language gets assigned the value associated to the group, divided by the number of languages commonly spoken by the group. We show that this family crucially depends on the monotonicity axiom used, and that a di¤erent interpretation leads to a vastly different family of functions, in which the value of a language is a simple function of its number of speakers. Specifically, the difference in the monotonicity axioms boils down to the following question: If a group shares a common language, is there any value in being able to communicate in another language? Our version, that we call Language inclusion monotonicity, says that there is. It leads to different policy implications, not necessarily favoring the majority languages. |
| Keywords: | value of language, communicative benefits, monotonicity, axiomatic analysis, |
| JEL: | C72 D61 D63 Z13 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:wis:wpaper:2403&r= |
| By: | Federico Fioravanti (University of Amsterdam/UNS-CONICET); Ulle Endriss (University of Amsterdam) |
| Abstract: | The Plurality rule for linear orders selects the alternatives most frequently appearing in the first position of those orders, while the Anti- Plurality rule selects the alternatives least often occurring in the final position. We explore extensions of these rules to partial orders, offering axiomatic characterisations for these extensions. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:329&r= |
| By: | Giacomo Calzolari; Leonardo Felli; Johannes Koenen; Giancarlo Spagnolo; Konrad O. Stahl |
| Abstract: | We investigate the role of mutual trust in long-term vertical relationships involving trades of complex goods. High complexity is associated with high contract incompleteness and hence the increased relevance of trust-based relational contracts. Contrary to expectations, we find that changes in trust do not impact the quality of highly complex objects. Instead, higher trust improves the quality of less complex objects. Even more surprisingly, trust is associated with more competi-tion in procurement, again for low tech objects. This complexity-based difference persists even when the same supplier provides both types of objects, suggesting relational contracting may be object-specific. These findings are derived from a comprehensive survey of buyers and critical suppliers in the German automotive industry. We explain these results with a relational contracting model, where the cost of switching suppliers is technology-specific and increases with object complexity, shifting bargaining power and altering the effects of trust on each party’s incentives. |
| Keywords: | relational contracts, complexity, bargaining power, trust, high-tech industries |
| JEL: | D86 L14 L62 O34 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11170&r= |
| By: | Xiang Hui; Tobias J. Klein; Konrad O. Stahl |
| Abstract: | Online ratings play an important role in many markets. However, how fast they can reveal seller types remains unclear. To study this question, we propose a new model in which a buyer learns about the seller’s type from previous ratings and her own experience and rates the seller if she learns enough. We derive two testable implications and verify them using administrative data from eBay. We also show that alternative explanations are unlikely to explain the observed patterns. After having validated the model in that way, we calibrate it to eBay data to quantify the speed of learning. We find that ratings can be very informative. After 25 transactions, the likelihood of correctly predicting the seller type is above 95 percent. |
| Keywords: | online markets, rating, reputation, Bayesian learning |
| JEL: | D83 L12 L13 L81 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11171&r= |