Revealing Negative Information in Monopoly and Duopoly Settings: Experimental Analysis

Dmitry A. Shapiro and Jaesun Lee
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Dmitry A. Shapiro: Seoul National University
Jaesun Lee: Tongji University

Korean Economic Review, 2022, vol. 38, 167-205

Abstract: We provide an experimental analysis of the setting where a seller, either a monopolist or a duopolist, sells a product with quality that is unobservable to buyers. The seller can send either an honest or dishonest cheap-talk message to buyers about the product quality. We show that low-quality sellers have a positive propensity to communicate their low-quality to buyers. Communicating low-quality results in buyers’ higher-propensity to purchase the product and introduces product differentiation in a duopoly. We do not find strong evidence that communicating low-quality information negatively affects sellers’ profit: the effect is often insignificant, and in some treatments it becomes significantly positive. Finally, revealing negative information has a strong positive welfare effect in a monopoly, where it raises the likelihood of product purchase; but a weak or negative effect in a duopoly, where it boosts the likelihood of purchasing a socially inefficient low-quality product.

Keywords: Negative Information; Lemon Market; Cheap-talk; Information Disclosure (search for similar items in EconPapers)
JEL-codes: C9 D21 L15 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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