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Cheap Talk, Round Numbers, and the Economics of Negotiation

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  • Matthew Backus
  • Tom Blake
  • Steven Tadelis

Abstract

Can sellers credibly signal their private information to reduce frictions in negotiations? Guided by a simple cheap-talk model, we posit that impatient sellers use round numbers to signal their willingness to cut prices in order to sell faster, and test its implications using millions of online bargaining interactions. Items listed at multiples of $100 receive offers that are 5% - 8% lower but that arrive 6 - 11 days sooner than listings at neighboring "precise" values, and are 3% - 5% more likely to sell. Similar patterns in real estate transactions suggest that round-number signaling plays a broader role in negotiations.

Suggested Citation

  • Matthew Backus & Tom Blake & Steven Tadelis, 2015. "Cheap Talk, Round Numbers, and the Economics of Negotiation," NBER Working Papers 21285, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:21285
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    References listed on IDEAS

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    2. Javier D. Donna & José†Antonio Espín†Sánchez, 2018. "Complements and substitutes in sequential auctions: the case of water auctions," RAND Journal of Economics, RAND Corporation, vol. 49(1), pages 87-127, March.
    3. Margarita Leib & Nils C. Köbis & Marc Francke & Shaul Shalvi & Marieke Roskes, 2021. "Precision in a Seller’s Market: Round Asking Prices Lead to Higher Counteroffers and Selling Prices," Management Science, INFORMS, vol. 67(2), pages 1048-1055, February.
    4. Reto Foellmi & Stefan Legge & Lukas Schmid, 2016. "Do Professionals Get It Right? Limited Attention and Risk‐taking Behaviour," Economic Journal, Royal Economic Society, vol. 0(592), pages 724-755, May.
    5. Lingfang (Ivy) Li & Steven Tadelis & Xiaolan Zhou, 2020. "Buying reputation as a signal of quality: Evidence from an online marketplace," RAND Journal of Economics, RAND Corporation, vol. 51(4), pages 965-988, December.
    6. Pope, Devin G. & Pope, Jaren C. & Sydnor, Justin R., 2015. "Focal points and bargaining in housing markets," Games and Economic Behavior, Elsevier, vol. 93(C), pages 89-107.
    7. Converse, Benjamin A. & Dennis, Patrick J., 2018. "The role of “Prominent Numbers” in open numerical judgment: Strained decision makers choose from a limited set of accessible numbers," Organizational Behavior and Human Decision Processes, Elsevier, vol. 147(C), pages 94-107.
    8. Dengfeng Yan, 2016. "Numbers Are Gendered: The Role of Numerical Precision," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 43(2), pages 303-316.

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    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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