Efficient Competition Through Cheap Talk: The Case of Competing Auctions

Abstract

We consider a large market where auctioneers with private reservation values compete for bidders by announcing cheap‐talk messages. If auctioneers run efficient first‐price auctions, then there always exists an equilibrium in which each auctioneer truthfully reveals her type. The equilibrium is constrained efficient, assigning more bidders to auctioneers with larger gains from trade. The choice of the trading mechanism is crucial for the result. Most notably, the use of second‐price auctions (equivalently, ex post bidding) leads to the nonexistence of any informative equilibrium. We examine the robustness of our finding in various dimensions, including finite markets and equilibrium selection.

Commitment and Costly Signaling in Decentralized Markets

“…The particulars of the bilateral bargaining protocol rule out the possibility that a deviation from truth‐telling can improve both the expected share of the surplus and the probability of a match. Kim and Kircher () show in a similar environment to this article that efficiency can be sustained without commitment to reservation prices for a class of trading protocols that includes first‐price auctions where bidders submit offers before observing the number of competitors. In contrast, the method of price determination here is such that falsely advertising a larger surplus improves the probability of multiple bidders without markedly reducing the aggressiveness of their offer strategy.…”

“…Albrecht et al (2015) show that even partial commitment to an asking price (specifically, only offers below the posted price can be rejected) is sufficient for achieving constrained efficiency in a setting where matching is multilateral and auctions determine the terms of trade. Two papers that fully relax price commitment are Menzio (2007) and Kim and Kircher (2014). Menzio (2007) shows that noncontractual messages in job listings can sometimes credibly convey information when wages are determined through bilateral bargaining.…”

“…In contrast to existing theories of competitive or directed search with private information that rely on strong commitment assumptions, 2 relaxing the assumption of full commitment to the announced terms of trade is an important element in this article. A related paper by Kim (2012) shows that nonbinding messages can support a partially separating equilibrium in a decentralized asset market when there is private information about the quality of the asset. Nonbinding list prices are ineffective here because it is the seller's reservation value that is private information, which is independent of the buyer's valuation.…”

Directed Search: A Guided Tour

“…The question is whether there is an equilibrium in which sellers send truthful messages in the first stage. Indeed this exists and it attains the efficient sorting of the fully competitive model (Kim and Kircher 2015). messages but are typically not binding (Albrecht et al 2016).…”

Meaning and credibility in experimental cheap-talk games

“… Regarding the lack of existence, for instance, no equilibrium outcome in the leading example of Crawford and Sobel ()—the uniform quadratic formulation—is neologism‐proof. Yet there are other instances where neologism‐proofness is relied upon to obtain sharper predictions (e.g., Gertner, Gibbons, and Scharfstein (), Farrell and Gibbons (, ), Austen‐Smith (), Lim (), Kim and Kircher ( )); see also the discussion in Farrell and Rabin (). A major question we pose in this paper is therefore: for the games in which neologism‐proofness has some bite, how well the refinement predicts play in the lab. …”