Efficient Competition Through Cheap Talk: Competing Auctions and Competitive Search Without Ex Ante Price Commitment

39 Pages Posted: 10 Dec 2013  

Kyungmin Kim

University of Iowa

Philipp Kircher

University of Pennsylvania - Department of Economics; IZA Institute of Labor Economics

Date Written: December 2013

Abstract

We consider a frictional two-sided matching market in which one side uses public cheap-talk announcements so as to attract the other side. We show that if the first-price auction is adopted as the trading protocol, then cheap talk can be perfectly informative, and the resulting market outcome is efficient, constrained only by search frictions. We also show that the performance of an alternative trading protocol in the cheap-talk environment depends on the level of price dispersion generated by the protocol: If a trading protocol compresses (spreads) the distribution of prices relative to the first-price auction, then an efficient fully revealing equilibrium always (never) exists. Our results identify the settings in which cheap talk can serve as an efficient competitive instrument, in the sense that the central insights from the literature on competing auctions and competitive search continue to hold unaltered even without ex ante price commitment.

Keywords: cheap talk, commitment, competitive search, directed search

JEL Classification: C72, D82, D83

Suggested Citation

Kim, Kyungmin and Kircher, Philipp, Efficient Competition Through Cheap Talk: Competing Auctions and Competitive Search Without Ex Ante Price Commitment (December 2013). CEPR Discussion Paper No. DP9785. Available at SSRN: https://ssrn.com/abstract=2365840

Kyungmin Kim (Contact Author)

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

Philipp Kircher

University of Pennsylvania - Department of Economics ( email )

160 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
United States
215-898-6777 (Phone)
215-573-2057 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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