Strategic Communication before Price Haggling: A Tale of Two Orientations

Abstract

Sellers may display unreasonably high prices (in high-cost oriented contexts) that are never accepted or would surely be discounted through bilateral bargaining. Conversely, general or vague prices with incredible appeals may be advertised (in low-cost oriented settings) as a range or for a category but not tied to specific items. Nevertheless, these seemingly irrelevant or unbinding prices can affect buyer behavior and bargaining outcome. This paper presents a new explanation for these puzzling phenomena. We propose that advertised reference prices can be a strategic tool to communicate privately known seller costs to influence optimal buyer strategy to search value information. We show that cheap-talk communication via uncommitted prices can be endogenously credible, because optimal buyer search strategy can be imperfectly aligned with seller preference. In particular, a high-cost seller may prefer the buyer to acquire information in a more cautious manner (i.e., less willing to stop at good news but more eager to quit at bad news) than a low-cost seller, which may coincide with the buyer's optimal search strategy. We demonstrate that endogenous buyer search can serve as a two-way discipline to regulate both high- and low-cost sellers' incentive for deception, which thus can sustain credible communication for high-cost and/or low-cost oriented settings.