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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 34, No. 3, pp.365-392
ISSN: 1225-0279 (Print)
Print publication date 31 Aug 2021
Received 18 Feb 2021 Revised 18 Jun 2021 Accepted 24 Jun 2021
DOI: https://doi.org/10.22904/sje.2021.34.3.002

Cheap-Talk Disclosure of Negative Information and Risk-Averse Buyers

Dmitry Shapiro ; Seung Huh
Dmitry Shapiro, Department of Economics and Institute of Economic Research, Seoul National University, 1 Gwanak-ro, Gwanak-gu, Seoul 08826, South Korea, Tel: 82-2-880-2287 dmitry.shapiro@snu.ac.kr
Seung Huh, Corresponding Author. College of Business Administration, Incheon National University, 119 Academy-ro, Yeonsu-Gu, Incheon 22012, South Korea, Tel: 82-32-835-8719 shuh@inu.ac.kr

JEL Classification: D21, D81, L15, M31

Abstract

In this paper, we study the incentives of low-quality sellers to separate them from high-quality sellers. We consider a framework with asymmetric quality information where the only way to communicate quality is via cheap-talk messages. In this framework, any separating strategy pursued by high-quality sellers can be imitated costlessly by low-quality sellers. We show that in the duopoly setting with risk-averse buyers, equilibria exist, where low-quality sellers voluntarily disclose negative information about their products. If the seller is a monopolist or buyers are risk-neutral, such equilibria do not exist.

Keywords:

Negative information, Risk aversion, Cheap talk, Product differentiation

Acknowledgments

This work was supported by the New Faculty Startup Fund of Seoul National University, Creative-Pioneering Researchers Program of Seoul National University and the fund from Incheon National University’s Research Grant (2020).

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