Abstract
This paper examines the incentives of low-quality sellers to truthfully communicate their product quality in an environment where high-quality sellers cannot fully separate themselves. Private information about the product’s quality can be conveyed through cheap-talk messages, and products are sold in one of four auction formats: first-price (FPA), second-price (SPA), all-pay (APA), or sealed-bid double auctions (DA). Our study finds that low-quality sellers can benefit from honestly communicating their quality under certain circumstances, such as in risky auction formats (DA and APA) and when there is a low prior probability of high-quality products. We also observe that low-quality claims can be more profitable, regardless of the competitiveness of the environment. Finally, we demonstrate that sellers’ ability to set reservation prices does not improve communication regarding product quality.
Published Version
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