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

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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.

Suggested Citation

  • Lars Frisell & Johann Lagerloef, 2005. "Eliciting Demand Information through Cheap Talk: An Argument in Favor of Price Regulations," Royal Holloway, University of London: Discussion Papers in Economics 05/10, Department of Economics, Royal Holloway University of London, revised Aug 2005.
    • Handle: RePEc:hol:holodi:0510
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    References listed on IDEAS

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    1. Farrell, Joseph & Gibbons, Robert, 1995. "Cheap Talk about Specific Investments," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 11(2), pages 313-334, October.
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    3. Schmalensee, Richard, 1981. "Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 71(1), pages 242-247, March.
    4. Katz, Michael L, 1987. "The Welfare Effects of Third-Degree Price Discrimination in," American Economic Review, American Economic Association, vol. 77(1), pages 154-167, March.
    5. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    6. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-875, September.
    7. O'Brien, Daniel P & Shaffer, Greg, 1994. "The Welfare Effects of Forbidding Discriminatory Discounts: A Secondary Line Analysis of Robinson-Patman," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 10(2), pages 296-318, October.
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    More about this item

    Keywords

    Price regulations; price discrimination; incomplete information; cheap talk; Robinson-Patman Act;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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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