Department of Economics, UCSD

The classic third degree price discrimination (3PD) model requires the knowledge of the distribution of buyer valuations and the covariate to set the price conditioned on the covariate. In terms of generating revenue, the classic result shows that 3PD is at least as good as uniform pricing. What if the seller has to set a price based only on a sample of observations from the underlying distribution? Is it still obvious that the seller should engage in 3PD? This paper sheds light on these fundamental questions. In particular, the comparison of the revenue performance between 3PD and uniform pricing is ambiguous overall when prices are set based on samples. This finding is in the nature of statistical learning under uncertainty: a curse of dimensionality, but also other small sample complications.

Abstract: In repeated games, where both collusive and noncollusive outcomes can be supported as equilibria, it is crucial to understand the likelihood of selection for each type of equilibrium. Controlled experiments have empirically validated a selection criterion for the two-player repeated prisoner’s dilemma: the basin of attraction for always defect. This prediction device uses the game primitives to measure the set of beliefs for which an agent would prefer to unconditionally defect rather than attempt conditional cooperation. This belief measure reflects strategic uncertainty over others’ actions, where the prediction is for noncooperative outcomes when the basin measure is full, and cooperative outcomes when empty. We expand this selection notion to multi-player social dilemmas and experimentally test the predictions, manipulating both the total number of players and the payoff tensions. Our results affirm the model as a tool for predicting long-term cooperation, while also speaking to some limitations when dealing with first-time encounters.

We experimentally document persistence of suboptimal behavior despite ample opportunities to learn from feedback in a canonical updating problem where people suffer from base-rate neglect. Our results provide insights on the mechanisms hindering learning from feedback. Importantly, our results suggest mistakes are more likely to be persistent when they are driven by incorrect mental models that miss or misrepresent important aspects of the environment. Such models induce confidence in initial answers, limiting engagement with and learning from feedback. We substantiate these insights in an alternative scenario where individuals involved in a voting problem overlook the importance of being pivotal. (JEL D83, D91)

Abstract: We present an experimental framework to study the extent to which failures of contingent thinking explain classic anomalies in a broad class of environments, including overbidding in auctions and the Ellsberg paradox. We study environments in which the subject’s choices affect payoffs only in some states, but not in others. We find that anomalies are in large part driven by incongruences between choices in the standard presentation of each problem and a ‘contingent’ presentation, which focuses the subject on the set of states where her actions matter. Additional evidence suggests that this phenomenon is in large part driven by people’s failure to put themselves in states that have not yet happened even though they are made aware that their actions only matter in those states.