Cheap Talk Advertising in Auctions: Horizontally vs Vertically Differentiated Products

Ian Jewitt and Daniel Li ()

No 2017_03, Department of Economics Working Papers from Durham University, Department of Economics

Abstract: This paper explores the possibilities for sellers to usefully transmit product information to buyers by cheap talk public advertising. We explore two polar cases, contrasting vertically differentiated products (a la Milgrom Weberís (1982) general symmetric model) with horizontally di§erentiated products (a la Hotellingís (1929) line). We consider both the message only case and where reserve price-message pairs can be chosen by the seller. For horizontally di§erentiated products partitional messageonly informative equilibria are shown to exist providing the number of bidders is sufficiently large. The equilibrium is characterized by more precise information provided for less popular product attributes. The seller optimal disclosure policy displays a complementarity relationship between the number of bidders and the amount of product information disclosed. In contrast, for the vertically di§erentiated products benchmark, message-only informative equilibria do not exist. With reserve prices, informative equilibria exist in both cases. For the vertical case these equilibria yield lower seller revenue than uninformative equilibria. In the horizontal case with sufficiently large number of bidders higher revenue is possible and full disclosure becomes feasible and seller optimal in the limit.

Keywords: Cheap Talk; Information Disclosure; Auction; Horizontal Differentiation; Vertical Differentiation; Informative Equilibrium (search for similar items in EconPapers)
JEL-codes: D44 D82 D83 L10 M37 (search for similar items in EconPapers)
Date: 2017-04
New Economics Papers: this item is included in nep-com, nep-mic and nep-mkt
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