Quality communication via cheap-talk messages in experimental auctions

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.