DP5343 Eliciting Demand Information through Cheap Talk: An Argument in Favour of Price Regulations

Author(s): Lars Frisell, Johan N. M. Lagerlöf
Publication Date: November 2005
Keyword(s): cheap talk, incomplete information, price discrimination, price regulations, Robinson-Patman Act
JEL(s): D82, L11, L42
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5343

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.