Working Paper: CEPR ID: DP5343
Authors: Lars Frisell; Johan N.M. Lagerlöf
Abstract: A firm must decide whether to launch a new product. A launch implies considerable fixed costs, so the firm would like to assess downstream demand before it decides. We study under which conditions a potential buyer would be willing to reveal his willingness to pay under different pricing regimes. We show that the firm's welfare - as well as consumers' - may be higher with a commitment to linear pricing than when pricing is unrestricted. That is, if informational asymmetries are significant, price regulations such as the Robinson-Patman Act may be endorsed by all parties.
Keywords: cheap talk; incomplete information; price discrimination; price regulations; Robinson-Patman Act
JEL Codes: D82; L11; L42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| linear pricing (D41) | efficient production (high demand) (D24) |
| linear pricing (D41) | wasteful production (low demand) (D24) |
| pricing restrictions (L42) | welfare gain (D69) |
| information sharing (O36) | welfare gain (D69) |
| linear pricing (D41) | production efficiency (D24) |