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): price regulations , price discrimination , incomplete information , cheap talk , Robinson-Patman Act

JEL(s): D82 , L11 , L42

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP5343.asp

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.