Cheap Talk in Bilateral Trade
For economists and mechanism designers, this paper provides a realistic solution concept for bilateral trade that bridges the gap between full commitment and no commitment, showing when cheap talk can improve efficiency.
The paper studies optimal selling mechanisms when a seller can commit to prices but not to more complex contracts, using cheap talk communication. It proves that cheap talk cannot improve outcomes with a single good, but creates value in settings with multiple goods, units, interdependent values, or repeated play, and multiple rounds can outperform a single round.
A single seller offers one or more goods to a single buyer. The buyer's values and the seller's costs are private information. Each player has a commonly known prior over the other player's value or cost, supported on a finite set. What is the optimal selling mechanism? We argue that, despite this question's importance and apparent simplicity, prior work offers no satisfactory answer. If the seller simply chooses an optimal menu given her realized costs, she fails to exploit her informational advantage. At the other extreme, the optimal trade mechanism that satisfies IC/IR constraints for both parties fails in practice, as it conditions prices on the seller's unknown costs in an unenforceable way. The seller's realistic capabilities lie somewhere in between: she may leverage private information but lacks unlimited commitment power. To bridge this gap, we consider a solution concept built on the realistic assumption that the seller can commit to prices but nothing more. Similar -- albeit technically distinct -- solution concepts have been studied in the context of auctions with multiple buyers. Our concept proves surprisingly rich even with a single buyer. In our model, the buyer and seller engage in multiple rounds of cheap talk before the seller posts a menu of priced bundles. The buyer then purchases. We measure value as profit for the seller and consumer surplus for the buyer. We prove that with a single good cheap talk cannot help either party, but show that it creates value in any extension of this canonical setting: multiple goods, multiple units, interdependent values, or repeated play. We also show that multiple rounds of communication can yield strictly higher expected profit than a single round. Finally, we discuss how realistic factors beyond our stripped-down model combine with cheap talk to enhance this value even further.