Eliciting Demand Information Through Cheap Talk: An Argument in Favor of Price Regulations
13 Pages Posted: 5 Nov 2005
Date Written: October 26, 2005
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.
Keywords: Price regulations, price discrimination, incomplete information, cheap talk, Robinson-Patman Act
JEL Classification: D82, L11, L42
Suggested Citation: Suggested Citation
