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Discussion Paper Details

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

Author(s): Lars Frisell and Johan N. M. Lagerlöf

Publication Date: November 2005

Keyword(s): cheap talk, incomplete information, price discrimination, price regulations and Robinson-Patman Act

Programme Area(s): Industrial Organization

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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Bibliographic Reference

Frisell, L and Lagerlöf, J. 2005. 'Eliciting Demand Information through Cheap Talk: An Argument in Favour of Price Regulations'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5343