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on Microeconomics |
| By: | Dirk Bergemann (Yale University); Stephen Morris (Massachusetts Institute of Technology); Rafael Veiel (Massachusetts Institute of Technology) |
| Abstract: | Two information structures are said to be close if, with high probability, there is approximate common knowledge that interim beliefs are close under the two information structures. We define an Òalmost common knowledge topologyÓ reflecting this notion of closeness. We show that it is the coarsest topology generating continuity of equilibrium outcomes. An information structure is said to be simple if each player has a finite set of types and each type has a distinct first-order belief about payoff states. We show that simple information structures are dense in the almost common knowledge topology and thus it is without loss to restrict attention to simple information structures in information design problems. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2413 |
| By: | Masaki Aoyagi (ISER, Osaka University); Maxime Menuet (Université Côte d'Azur, CNRS, GREDEG, France) |
| Abstract: | This paper studies the optimal disclosure of information about an agent's quality when it is a combination of a component privately observed by the agent and another latent component. Upon soliciting a report from the agent about his private observation, a principal performs a test which reveals the latent component. The principal then discloses information to the market/public which rewards the agent with compensation equal to the agent's expected quality. We study incentive compatible disclosure rules that minimize the mismatch between the agent's true and expected qualities while inducing truth-telling from the agent. The optimal rule entails full disclosure when the agent's quality is a supermodular function of the two components, but entails partial pooling when it is submodular. We express the optimization problem as a linear transformation of the mean dual-belief, which describes the joint distribution of prior and mean posterior beliefs under disclosure, and obtain the optimal disclosure rule as a corner solution to this linear problem. We identify the number of messages required under the optimal rule and relate it to the agent's incentive compatibility conditions. |
| Keywords: | quality, mechanism, revelation, pooling, separating |
| JEL: | C72 D47 D82 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:gre:wpaper:2024-30 |
| By: | James Albrecht; Xiaoming Cai; Pieter Gautier; Susan Vroman; Pieter A. Gautier |
| Abstract: | This paper considers competitive search equilibrium in a market for a good whose quality differs across sellers. Each seller knows the quality of the good that he or she is offering for sale, but buyers cannot observe quality directly. We thus have a “market for lemons” with competitive search frictions. In contrast to Akerlof (1970), we prove the existence of a unique equilibrium, which is separating. Higher-quality sellers post higher prices, so price signals quality. The arrival rate of buyers is lower in submarkets with higher prices, but this is less costly for higher-quality sellers given their higher continuation values. For some parameter values, higher-quality sellers post the full-information price; for other values these sellers have to post a higher price to keep lower-quality sellers from mimicking them. In an extension, we show that if sellers compete with auctions, the reserve price can also act as a signal. |
| Keywords: | competitive search, signaling |
| JEL: | C78 D82 D83 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11309 |
| By: | Fan Wu |
| Abstract: | I study a principal-agent model in which a principal hires an agent to collect information about an unknown continuous state. The agent acquires a signal whose distribution is centered around the state, controlling the signal's precision at a cost. The principal observes neither the precision nor the signal, but rather, using transfers that can depend on the state, incentivizes the agent to choose high precision and report the signal truthfully. I identify a sufficient and necessary condition on the agent's information structure which ensures that there exists an optimal transfer with a simple cutoff structure: the agent receives a fixed prize when his prediction is close enough to the state and receives nothing otherwise. This condition is mild and applies to all signal distributions commonly used in the literature. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.13978 |
| By: | Hammond, Peter J (University of Warwick) |
| Abstract: | A decision-making agent is usually assumed to be Bayesian rational, or to maximize subjective expected utility, in the context of a completely and correctly speci ed decision model. Following the discussion in Hammond (2007) of Schumpeter's (1911, 1934) concept of entrepreneurship, and of Shackle's (1953) concept of potential surprise, this paper considers enlivened decision trees whose growth over time cannot be accurately modelled in full detail. An enlivened decision tree involves more severe limitations than model mis-speci cation, unforeseen contingencies, or unawareness, all of which are typically modelled with reference to a universal state space large enough to encompass any decision model that an agent may consider. We consider three motivating examples based on: (i) Homer's classic tale of Odysseus and the Sirens; (ii) a two-period linear-quadratic model of portfolio choice; (iii) the game of Chess. Though our novel framework transcends standard notions of risk or uncertainty, a form of Bayesian rationality is still possible. Instead of subjective probabilities of different models of a classical finite decision tree, we show that Bayesian rationality and continuity imply subjective expected utility maximization when some terminal nodes have attached real-valued subjective evaluations instead of consequences. Moreover, subjective evaluations lie behind, for example, the kind of Monte Carlo tree search algorithm that has been used by some powerful chess-playing software packages. |
| Keywords: | Prerationality ; consequentialist decision theory ; entrepreneurship ; potential surprise ; enlivened decision trees ; subjective evaluation of continuation ; subtrees ; Monte Carlo tree search. JEL Codes: D81 ; D91 ; D11 ; D63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1524 |
| By: | Jay Pil Choi; Heiko Gerlach |
| Abstract: | This paper analyzes private and social incentives to levy an ad valorem licensing fee in a supply chain governed by the legal principle of patent exhaustion. With perfect competition at the upstream and downstream stage, the choice of the licensing segment is irrelevant for the patent holder and consumers. When exactly one segment of the value chain is monopolistic while the other one is competitive, the patent holder prefers licensing at the monopolistic stage leading to an alignment of private and social incentives. With imperfect competition at both stages, excessive downstream licensing can arise. We demonstrate that charging licensing fees at both stages of the supply chain (“double-dipping”) can be profitable for the patent holder and beneficial for consumers. We discuss the implications of this result for the application of the patent exhaustion principle. |
| Keywords: | patent licensing, supply chain, first sale doctrine, patent exhaustion, double-dipping |
| JEL: | D43 L41 L44 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11313 |
| By: | Yuma Fujimoto; Kaito Ariu; Kenshi Abe |
| Abstract: | Auction is one of the most representative buying-selling systems. A celebrated study shows that the seller's expected revenue is equal in equilibrium, regardless of the type of auction, typically first-price and second-price auctions. Here, however, we hypothesize that when some auction environments vary with time, this revenue equivalence may not be maintained. In second-price auctions, the equilibrium strategy is robustly feasible. Conversely, in first-price auctions, the buyers must continue to adapt their strategies according to the environment of the auction. Surprisingly, we prove that revenue equivalence can be broken in both directions. First-price auctions bring larger or smaller revenue than second-price auctions, case by case, depending on how the value of an item varies. Our experiments also demonstrate revenue inequivalence in various scenarios, where the value varies periodically or randomly. This study uncovers a phenomenon, the breaking of revenue equivalence by the time-varyingness in auctions, that likely occurs in real-world auctions, revealing its underlying mechanism. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.12306 |
| By: | Gomes, Renato; Lefouili, Yassine |
| Abstract: | This paper explores the pricing of ancillary payment services by platforms and its implications for welfare. We distinguish between two types of platforms: vertical platforms that operate their own closed payment schemes, and stacked platforms that offer payment services through open schemes operated by third parties. We analyze the impact of a regulation mandating platforms to provide access to third-party payment services and examine the regulation of interchange fees within the context of stacked platforms. |
| Keywords: | platforms, payment services, ancillary services, regulation, interoperability, interchange fee |
| JEL: | L51 L86 E42 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129914 |
| By: | Paul Heidhues; Mats Köster; Botond Kőszegi; Botond Köszegi |
| Abstract: | We develop a theory of digital ecosystems built on the premise that a multi-market firm can steer users it has in one market toward its products in other markets. Due to this “cross-market leverage, ” a leader in an “access-point” market (where users begin their online journeys) derives a high value from offering services in connected markets (where users continue their journeys), and can thus make profitable takeovers. Indeed, because the firm has the outside option of acquiring, and steering users toward, its target’s competitor, it can take over the target at a discount. In contrast, other firms have no or smaller incentives for takeovers, explaining why ecosystems grow out of market leaders at access points. Conversely, cross-market leverage also implies that once an ecosystem has grown, it has an increased value of controlling access points, so it may go to great lengths to dominate these markets. Our theory suggests that ecosystems have mixed implications for consumer welfare. Under plausible assumptions, a to-be ecosystem takes over market leaders, and this consolidation of good services across markets benefits consumers in the short run. But an ecosystem’s takeovers and dominance of access points lower incentives for entry and innovation, and lower the efficiency of access-point markets with superior alternatives. Hence, the long-run welfare implications of ecosystems are often negative. |
| Keywords: | digital ecosystems, takeover, contestability, entry, envelopment, default effects, steering |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11332 |
| By: | Charles F. Manski; Eytan Sheshinski |
| Abstract: | We consider a utilitarian planner with the power to design a discrete choice set for a heterogeneous population with bounded rationality. We find that optimal paternalism is subtle. The policy that most effectively constrains or influences choices depends on the preference distribution of the population and on the choice probabilities conditional on preferences that measure the suboptimality of behavior. We first consider the planning problem in abstraction. We next examine policy choice when individuals measure utility with additive random error and maximize mismeasured rather than actual utility. We then analyze a class of problems of binary treatment choice under uncertainty. Here we suppose that a planner can mandate a treatment conditional on publicly observed personal covariates or can decentralize decision making, enabling persons to choose their own treatments. Bounded rationality may take the form of deviations between subjective personal beliefs and objective probabilities of uncertain outcomes. We apply our analysis to clinical decision making in medicine. Having documented that optimization of paternalism requires the planner to possess extensive knowledge that is rarely available, we address the difficult problem of paternalistic policy choice when the planner is boundedly rational. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.13658 |
| By: | Hennessy, David; Lapan, Harvey |
| Abstract: | The typical firm produces for sale a plural number of distinct product lines. This paper characterizes the composition of a firm’s optimal production vector as a function of cost and revenue function attributes. The approach taken applies mathematical group theory and revealed preference arguments to exploit controlled asymmetries in the production environment. Assuming some symmetry on the cost function, our central result shows that all optimal production vectors must satisfy a dominance relation on permutations of the firm’s revenue function. When the revenue function is linear in outputs, then the set of admissible output vectors has linear bounds up to transformations. If these transformations are also linear, then convex analysis can be applied to characterize the set of admissible solutions. When the group of symmetries decomposes into a direct product group with index K in N, then the characterization problem separates into κ problems of smaller dimension. The central result may be strengthened when the cost function is assumed to be quasiconvex. |
| Date: | 2024–11–04 |
| URL: | https://d.repec.org/n?u=RePEc:isu:genstf:202411041948040000 |
| By: | Zhengyang Liu; Haolin Lu; Liang Shan; Zihe Wang |
| Abstract: | In this paper, we consider the dynamic oscillation in the Cournot oligopoly model, which involves multiple firms producing homogeneous products. To explore the oscillation under the updates of best response strategies, we focus on the linear price functions. In this setting, we establish the existence of oscillations. In particular, we show that for the scenario of different costs among firms, the best response converges to either a unique equilibrium or a two-period oscillation. We further characterize the oscillations and propose linear-time algorithms for finding all types of two-period oscillations. To the best of our knowledge, our work is the first step toward fully analyzing the periodic oscillation in the Cournot oligopoly model. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.09435 |
| By: | Ryoji Jinushi |
| Abstract: | As consumers have limited capacity to process information, advertisers must compete for attention. This creates information congestion which produces social loss like unread advertisements. We apply population games and best response dynamics to analyze information congestion. Multiple equilibria impair traditional policies, and thus, non-traditional policies are examined to lead the system to a Pareto efficient equilibrium. We achieve this by changing the cost per message multiple times during the evolutionary process. In this process, policymakers gradually but incompletely investigate externalities and adjust the speed of cost changes. Such complicated policies are costly, which confirms the inefficiency of advertising structures where advertisers send unsolicited messages. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:tcr:wpaper:e210 |
| By: | Kento Yoshida; Kei Kimura; Taiki Todo; Makoto Yokoo |
| Abstract: | Facility location games provide an abstract model of mechanism design. In such games, a mechanism takes a profile of $n$ single-peaked preferences over an interval as an input and determines the location of a facility on the interval. In this paper, we restrict our attention to distance-based single-peaked preferences and focus on a well-known class of parameterized mechanisms called ordered weighted average methods, which is proposed by Yager in 1988 and contains several practical implementations such as the standard average and the Olympic average. We comprehensively analyze their performance in terms of both incentives and fairness. More specifically, we provide necessary and sufficient conditions on their parameters to achieve strategy-proofness, non-obvious manipulability, individual fair share, and proportional fairness, respectively. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.12884 |
| By: | Hennessy, David; Lapan, Harvey |
| Abstract: | We explore connections between the certainty equivalent return (CER) functional and the underlying utility function. Curvature properties of the functional depend upon how utility function attributes relate to Hyperbolic Absolute Risk Aversion (HARA) type utility functions. If the CER functional is concave, i.e., if risk tolerance is concave in wealth, then preferences are standard. The CER functional is linear in lotteries if utility is HARA and lottery payoffs are on a line in state space. Implications for the optimality of portfolio diversification are given. When utility is concave and Non-increasing Relative Risk Averse, then the CER functional is superadditive in lotteries. Depending upon the nature of covariation among lottery payoffs, CERs for Constant Absolute Risk Averse utility functions may be subadditive or superadditive in lotteries. Our approach lends itself to straightforward experiments to elicit higher order attributes on risk preferences. |
| Date: | 2024–10–29 |
| URL: | https://d.repec.org/n?u=RePEc:isu:genstf:202410291658110000 |
| By: | Chavda, Ankur (HEC Paris); Gans, Joshua S. (University of Toronto); Stern, Scott (Massachusetts Institute of Technology) |
| Abstract: | How should theory-based entrepreneurs search for strategies to implement their ideas? The theory-based view of strategy posits that decision-makers hold theories about their environment premised on beliefs that should be actively tested. This causal framework, which underlies the theory-based view, also has implications for entrepreneurial search: the process by which entrepreneurs uncover strategies to implement their ideas. In this paper, we develop a Bayesian model where entrepreneurs update their beliefs as they conduct entrepreneurial search. We find several optimal behaviors for theory-based entrepreneurs such as reverting to a previous strategy after finding a relatively poor strategy and continuing to search after finding a relatively good strategy, which are missing when entrepreneurs lack such a theory-based approach. As these predictions align with examples of successful entrepreneurs, our findings both provide a method to empirically identify skilled entrepreneurs and demonstrate the usefulness of applying the theory-based view to entrepreneurial behavior more generally. |
| Keywords: | entrepreneurial search; theory-based view; stopping rule; Knightian uncertainty |
| JEL: | D81 D83 O32 |
| Date: | 2024–02–13 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1505 |
| By: | Indraneel Dasgupta |
| Abstract: | We model a rent-seeking contest among two ‘identity ideologues’, differentially located along a uni-dimensional identity continuum, and a ‘mercenary’, who can choose any location in-between. The contest jointly awards an identity-relevant good (‘religion’) and an identity-irrelevant good (‘money’). The mercenary values only money, the ideologues value both money and religion. The ideologues are worse off, at an increasing rate, when the winner is located farther away. We show that, under reasonable restrictions, the following hold. A decline in the mercenary’s cost of contest effort reduces conflict. Both ideologues lose in success probability but gain in expected utility. Elimination of the mercenary increases conflict and makes the ideologues more successful yet worse off. Our results rationalize ‘imperial peace’ – long periods of stability and social peace in multi-ethnic empires and explain why the weakening and breakdown of such empires is often associated with a sharp rise in ethnic violence within their territories. |
| Keywords: | Rent-seeking contest, Identitarian distance, Ethnic conflict, Imperial peace, |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:not:notcre:24/06 |
| By: | Oz Shy |
| Abstract: | Sales tax is generally not included in the advertised price quoted to consumers in the United States. In contrast, value added taxes (VAT) are embedded into the price in most other countries. This article investigates how the two different pricing structures and consumers' decision-making process affect the intensity of price competition. The two pricing structures yield identical market outcomes with fast-computing consumers who are willing and able to recompute the exact sales tax each time there is a price change. With slow-computing consumers, prices and profits are higher when sellers quote and compete in prices without sales tax. In this case, a model extension with two-stage decision making shows that the entire tax burden is shifted to the consumers when they completely ignore sales tax during their initial search. |
| Keywords: | price competition; price comparisons; sales tax; value added tax; fast and slow-computing consumers; mental accounting; inattention; consumer decision making |
| JEL: | D43 H29 L13 M3 |
| Date: | 2024–06–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99031 |