Cheap talk advertising in auctions : horizontally vs vertically differentiated products

Li, Daniel; Jewitt, Ian

Abstract

This paper explores the possibilities for sellers to usefully transmit product infor- mation to buyers by cheap talk public advertising. We explore two polar cases, con- trasting vertically di¤erentiated products (à la Milgrom Weber’s (1982) general sym- metric model) with horizontally di¤erentiated products (à la Hotelling’s (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 message- only informative equilibria are shown to exist providing the number of bidders is su¢ ciently large. The equilibrium is characterized by more precise information pro- vided 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 su¢ - ciently large number of bidders higher revenue is possible and full disclosure becomes feasible and seller optimal in the limit.

Citation

Li, D., & Jewitt, I. (2017). Cheap talk advertising in auctions : horizontally vs vertically differentiated products

• Working Paper Type: Working Paper
• Publication Date: Jan 1, 2017
• Deposit Date: May 31, 2019
• Publicly Available Date: May 31, 2019
• Series Title: Durham University Business School working papers series
• Public URL: https://durham-repository.worktribe.com/output/1169127
• Publisher URL: https://www.dur.ac.uk/business/research/economics/working-papers/