Can cheap talk overcome information disclosure in buyer-seller communication?

Abstract

We compare two types of costless communication, Cheap Talk and Information Disclosure, in a buyer-seller interaction where the buyer has private information about his ideal location in the product space and the seller is entitled to make a takeit-or-leave-it offer comprising a product location and a price. We show that Cheap Talk can overcome Information Disclosure in terms of seller’s payoff and, generally, welfare. Under Information Disclosure, the buyer garbles the signal compared to the one in a Cheap Talk equilibrium to persuade a lower price which inevitably reduces profits. However, Information Disclosure may also reduce product attractiveness and, thus, welfare.