Revealing Negative Information in Monopoly and Duopoly Settings: Experimental Analysis

Abstract

We provide an experimental analysis of the setting where a seller, either a monopolist or a duopolist, sells a product with quality that is unobservable to buyers. The seller can send either an honest or dishonest cheap-talk message to buyers about the product quality. We show that low-quality sellers have a positive propensity to communicate their low-quality to buyers. Communicating low-quality results in buyers' higher-propensity to purchase the product and introduces product differentiation in a duopoly. We do not find strong evidence that communicating low-quality information negatively affects sellers' profit: the effect is often insignificant, and in some treatments it becomes significantly positive. Finally, revealing negative information has a strong positive welfare effect in a monopoly, where it raises the likelihood of product purchase; but a weak or negative effect in a duopoly, where it boosts the likelihood of purchasing a socially inefficient low-quality product.