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Eliciting Demand Information through Cheap Talk: An Argument in Favour of Price Regulations

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Author Info
Frisell, Lars
Lagerlöf, Johan N.M.

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Abstract

A firm must decide whether to launch a new product. A launch implies considerable fixed costs, so the firm would like to assess downstream demand before it decides. We study under which conditions a potential buyer would be willing to reveal his willingness to pay under different pricing regimes. We show that the firm's welfare - as well as consumers' - may be higher with a commitment to linear pricing than when pricing is unrestricted. That is, if informational asymmetries are significant, price regulations such as the Robinson-Patman Act may be endorsed by all parties.

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Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5343.

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Date of creation: Nov 2005
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Handle: RePEc:cpr:ceprdp:5343

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Related research
Keywords: cheap talk; incomplete information; price discrimination; price regulations; Robinson-Patman Act;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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References listed on IDEAS
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  1. Farrell, Joseph & Gibbons, Robert, 1995. "Cheap Talk about Specific Investments," Journal of Law, Economics and Organization, Oxford University Press, vol. 11(2), pages 313-34, October.
  2. Katz, Michael L, 1987. "The Welfare Effects of Third-Degree Price Discrimination in," American Economic Review, American Economic Association, vol. 77(1), pages 154-67, March. [Downloadable!] (restricted)
  3. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September. [Downloadable!] (restricted)
  4. Riley, John & Zeckhauser, Richard, 1983. "Optimal Selling Strategies: When to Haggle, When to Hold Firm," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 267-89, May. [Downloadable!] (restricted)
  5. Schmalensee, Richard, 1981. "Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 71(1), pages 242-47, March. [Downloadable!] (restricted)
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  6. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-51, November. [Downloadable!] (restricted)
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