Communication strategy in partnership selection

Abstract

This paper explores the communication and choice strategies of economic agents deciding on a partnership, where agents are uncertain about their payoffs, and payoffs of each agent depend on and are partly known to the potential partner. Business examples of such decisions include mergers, acquisitions, distribution channel partners, as well as manufacturing and brand alliances. Dating and marriage partner selection are also natural examples of this game. The paper shows that (a) when communication is informative, the communication strategy as a function of the expected payoff of the partnership involves pretending fit when expected payoff is high, pretending misfit when expected payoff is low, and telling the truth in the intermediate range, and (b) the condition for informativeness of communication is that the distribution of payoffs has thin tails. Furthermore, the paper shows that the possibility of communication, even when this communication is not restricted to be truthful, can decrease the expected payoff for both the sender and the receiver; in particular, it can decrease the expected social welfare.