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

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  • Frisell, Lars
  • Lagerlöf, Johan N.M.

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

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  1. V. Crawford & J. Sobel, 2010. "Strategic Information Transmission," Levine's Working Paper Archive 544, David K. Levine.
  2. Schmalensee, Richard., 1980. "Output and welfare implications of monopolistic third-degree price discrimination," Working papers 1095-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Farrell, Joseph & Gibbons, Robert, 1995. "Cheap Talk about Specific Investments," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 11(2), pages 313-34, October.
  4. Riley, John & Zeckhauser, Richard, 1983. "Optimal Selling Strategies: When to Haggle, When to Hold Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(2), pages 267-89, May.
  5. 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.
  6. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
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