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Information transmission in monopolistic credence goods markets

Author

Listed:
  • Xiaoxiao Hu
  • Haoran Lei
Abstract
We study a general credence goods model with N problem types and N treatments. Communication between the expert seller and the client is modeled as cheap talk. We find that the expert's equilibrium payoffs admit a geometric characterization, described by the quasiconcave envelope of his belief-based profits function under discriminatory pricing. We establish the existence of client-worst equilibria, apply the geometric characterization to previous research on credence goods, and provide a necessary and sufficient condition for when communication benefits the expert. For the binary case, we solve for all equilibria and characterize client's possible welfare among all equilibria.

Suggested Citation

  • Xiaoxiao Hu & Haoran Lei, 2023. "Information transmission in monopolistic credence goods markets," Papers 2303.13295, arXiv.org, revised Apr 2023.
    • Handle: RePEc:arx:papers:2303.13295
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    References listed on IDEAS

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    1. Yuk‐Fai Fong & Xiaoxiao Hu & Ting Liu & Xiaoxuan Meng, 2020. "Using Customer Service to Build Clients’ Trust," Journal of Industrial Economics, Wiley Blackwell, vol. 68(1), pages 136-155, March.
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    6. Archishman Chakraborty & Rick Harbaugh, 2010. "Persuasion by Cheap Talk," American Economic Review, American Economic Association, vol. 100(5), pages 2361-2382, December.
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    7. Lewis, Tracy R & Sappington, David E M, 1994. "Supplying Information to Facilitate Price Discrimination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 309-327, May.
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    9. Elliot Lipnowski & Doron Ravid, 2020. "Cheap Talk With Transparent Motives," Econometrica, Econometric Society, vol. 88(4), pages 1631-1660, July.
    10. Doron Ravid & Anne-Katrin Roesler & Balázs Szentes, 2022. "Learning before Trading: On the Inefficiency of Ignoring Free Information," Journal of Political Economy, University of Chicago Press, vol. 130(2), pages 346-387.
    11. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
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