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

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Author Info

  • Lars Frisell

    (Sveriges Riksbank)

  • Johan N.M. Lagerlof

    (Royal Holloway, University of London)

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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File URL: http://128.118.178.162/eps/io/papers/0510/0510011.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Industrial Organization with number 0510011.

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Length: 13 pages
Date of creation: 27 Oct 2005
Date of revision:
Handle: RePEc:wpa:wuwpio:0510011

Note: Type of Document - pdf; pages: 13
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Web page: http://128.118.178.162

Related research

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

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  1. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-51, November.
  2. 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.
  3. Schmalensee, Richard, 1981. "Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 71(1), pages 242-47, March.
  4. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
  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. 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.
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