Commitment and Cheap Talk in Search Deterrence: Exploding Offers Buy-Now Discount

Abstract

This paper theoretically and experimentally investigates two prevailing search deterrence tactics, exploding offer and buy-now discount, under various commitment conditions. An exploding offer is a take-it-or-leave-it offer that expires if the recipient does not accept before a given deadline. A buy-now discount is a high-pressure tactic that specifies a higher buy-later price so as to encourage early transactions. In an experimental setting where the two tactics are predicted to generate the same equilibrium outcome under full commitment, we find exploding offers are implemented more optimally and are more effective in search deterrence. Consistent with the theory, the removal of a seller's power to commit sharply decreases the frequency of exploding offers while leaving the use of buy-now discounts largely unaffected. Allowing a seller to cheap talk can significantly influence the buyer's search and return decisions. Cheap talk is mostly used to deter search in the exploding offer game but to induce return in the buy-now discount game. Such different cheap talk strategies can be largely explained by our behavioral model, where we introduce a behavioral type of buyers who naively believe the seller's cheap talk.

About the presenter’s visit

Dr Siqi Pan will be visiting the School of Economics on Thursday 2^nd May 2019.  While here she will be using room 520A Colin Clark Building.  If you would like to meet with her or have lunch or dinner with her please contact Dr Kenan Kalayci who will be her host while at The University of Queensland.  Dr Kalayci can be contact on k.kalayci@uq.edu.au.