on the simple economics of advertising marketing and product design we propose a framework for analyzing transformations of demand such transformations frequently stem from changes in the dispersion of consumers valuations which lead to rotations of the demand curve in many settings profits are a u shaped function of dispersion high dispersion is complemented by niche production and low dispersion is complemented by mass market supply we investigate numerous applications including product design advertising marketing and sales advice and the construction of quality differentiated product lines we also suggest a new taxonomy of advertising distinguishing between hype which shifts demand and real information which rotates demand

efficient competition through cheap talk the case of competing auctions we consider a large market where auctioneers with private reservation values compete for bidders by announcing cheap talk messages if auctioneers run efficient first price auctions then there always exists an equilibrium in which each auctioneer truthfully reveals her type the equilibrium is constrained efficient assigning more bidders to auctioneers with larger gains from trade the choice of the trading mechanism is crucial for the result most notably the use of second price auctions equivalently ex post bidding leads to the nonexistence of any informative equilibrium we examine the robustness of our finding in various dimensions including finite markets and equilibrium selection

a theory of credibility this paper presents models in which one agent must decide whether to trust another whose motives are uncertain reliability can only be communicated through actions in this context it pays for people to build a reputation based on reliable behaviour someone becomes credible by consistently providing accurate and valuable information or by performing useful services the theory provides a justification for long term arrangements without binding contracts it also describes those situations where it pays an agent to cash in on his reputation many decisions depend on trusting someone consumers must decide whether to believe advertisements banks need to judge the reliability of loan applicants and employers must decide how much responsibility to delegate to their employees this paper attempts to model situations that arise when someone is uncertain about whether to trust the people he deals with in this context reputations for reliability are valuable an agent becomes credible by consistently providing accurate valuable information or by always acting responsibly i analyse a series of simple abstract models of information transmission in the basic model there are two agents the sender s and the receiver r who are to play the game a known finite number of times at each stage both players learn the value of a parameter measuring the importance of that period s play of the game that is the value of making a correct decision and s obtains payoff relevant information s then sends a signal to r who makes a decision that affects the welfare of both players after both players learn the consequences of r s decision the process repeats at each stage r must decide what action to take in order to do that he must assess the credibility of s the difficulty arises because r is uncertain about s s preferences when play begins i model this by assuming that with positive probability s has identical preferences to r s is a friend and with positive probability s has completely opposed preferences to r s is an enemy this uncertainty creates a trade off for enemy senders at each stage providing honest information enhances s s reputation but only at the expense of foregoing an opportunity for immediate gain by duping r the possibility that s is a friend lends credibility to what he says but this credibility may also be exploited by an enemy s the principal equilibrium has the following form in the basic model where s has no control over the importance of a given play s typically conveys accurate information for the first several periods r raises the probability he places on s being friendly after receiving accurate information if he believes that an enemy would have lied to him with positive probability the more important the information the more likely an enemy will attempt to deceive r an enemy will eventually take advantage of r by misleading him when this happens the sender loses all opportunities for deception in the future i

misselling through agents this paper analyzes the implications of the inherent conflict between two tasks performed by direct marketing agents prospecting for customers and advis ing on the product s suitability for the specific needs of customers when structuring salesforce compensation firms trade off the expected losses from misselling unsuitable products with the agency costs of providing market ing incentives we characterize how the equilibrium amount of misselling and thus the scope of policy intervention depends on features of the agency problem including the internal organization of a firm s sales process the transparency of its commission structure and the steepness of its agents sales incentives jel m31 m37 m52 when purchasing unfamiliar products consumers often rely on information and advice pro vided by representatives of the seller this creates the possibility of misselling the question able practice of a salesperson selling a product that may not match a customer s specific needs 1 this problem is particularly severe in markets for technically complex products such as con sumer electronics auto repairs medical care and retail financial services including securities pensions insurance policies and mortgages an important feature of these markets is that the seller often deals with the customer through an agent rather than directly for example financial brokers typically recommend purchase of a specific product after inquiring about their customers particular circumstances and needs the possibility of abuse has led to regulation in some of these markets most notably for securities transactions the financial industry regulatory authority finra the major self regulatory organization for securities firms operating in the united states mandates that broker dealers make a reasonable effort to obtain information about the individual characteristics of their noninstitutional cus tomers and to ensure that their recommendations are suitable to customers financial situations

aggregation and social choice a mean voter theorem a celebrated result of black 1948a demonstrates the existence of a simple majority winner when preferences are single peaked the social choice follows the preferences of the median voter the median voter s most preferred outcome beats any alternative however this conclusion does not extend to elections in which candidates differ in more than one dimension this paper provides a multi dimensional analog of the median voter result we provide conditions under which the mean voter s most preferred outcome is unbeatable according to a 64 majority rule the conditions supporting this result represent a significant generalization of caplin and nalebuff 1988 the proof of our mean voter result uses a mathematical aggregation theorem due to prekopa 1971 1973 and borell 1975 this theorem has broad applications in economics an application to the distribution of income is described at the end of this paper results on imperfect competition are presented in the companion paper caplin and nalebuff 1991

persuasive communication when the sender s incentives are uncertain abstract we study persuasion in a modified crawford sobel sender receiver game in which the receiver makes a binary decision to accept or reject a good recommended by the sender the good s quality and the sender s type neutral or biased are not observable to the receiver these alterations yield a simple model and a unique truth telling equilibrium in which neutral senders who observe different qualities fully separate but can only communicate low quality levels accurately biased senders adopt a mixed strategy that can successfully persuade the receiver to accept the good most of the time when the sender s degree of bias is continuously distributed a truth telling equilibrium does not exist nonetheless a partition equilibrium exists for any given number of partitions on the message space

a model of expertise we study a model in which perfectly informed experts offer advice to a decision maker whose actions affect the welfare of all experts are biased and thus may wish to pull the decision maker in different directions and to different degrees when the decision maker consults only a single expert the expert withholds substantial information from the decision maker we ask whether this situation is improved by having the decision maker sequentially consult two experts we first show that there is no perfect bayesian equilibrium in which full revelation occurs when both experts are biased in the same direction it is never beneficial to consult both in contrast when experts are biased in opposite directions it is always beneficial to consult both indeed in this case full revelation may be induced in an extended debate by introducing the possibility of rebuttal

in defense of unanimous jury verdicts mistrials communication and strategic voting the requirement of unanimous jury verdicts in criminal trials is widely believed to reduce the likelihood of convicting the innocent this belief depends largely upon the assumption that jurors will vote nonstrategically based on their impression of the trial evidence recent literature however has questioned this assumption and feddersen and pesendorfer propose a model in which it is never a nash equilibrium for jurors to vote nonstrategically under unanimity rule and equilibrium behavior produces higher probabilities of both convicting the innocent and acquitting the guilty under unanimity rule than under numerous alternatives i extend this work by incorporating two additional features of actual jury procedure the possibility of mistrial and communication among jurors under each circumstance i demonstrate that nonstrategic voting is a nash equilibrium under fairly general conditions and that unanimity performs better than any alternative rule in minimizing probability of trial error and maximizing expected utility

promotional reviews an empirical investigation of online review manipulation abstract firms incentives to manufacture biased user reviews impede review usefulness we examine the differences in reviews for a given hotel between two sites expedia com only a customer can post a review and tripadvisor com anyone can post we argue that the net gains from promotional reviewing are highest for independent hotels with single unit owners and lowest for branded chain hotels with multiunit owners we demonstrate that the hotel neighbors of hotels with a high incentive to fake have more negative reviews on tripadvisor relative to expedia hotels with a high incentive to fake have more positive reviews on tripadvisor relative to expedia jel l15 l83 m31

persuasion by cheap talk we consider the credibility persuasiveness and informativ eness of multidimensional cheap talk by an expert to a decision maker we find that an expert with state independent preferences can always make credible comparative statements that trade off the expert s incentive to exaggerate on each dimension such communication benefits the expert cheap talk is persuasive if her preferences are quasiconvex communication benefits a decision maker by allowing for a more informed decision but strategic interactions between multiple decision makers can reverse this gain we apply these results to topics including product recommendations voting auction disclosure and advertising jel d44 d72 d82 d83 m37

household formation female labor supply and savings in this paper we aim to quantify the impact of changing family structures on labor supply and savings in western societies our dynamic general equilibrium model features both genders and it takes into account changes in marital status as a stochastic process the numerical results indicate that changes in household formation can partly explain the reallocation of male and female labor supply observed during the last decades in germany we also find a negative impact on capital accumulation and we show that a combination of higher marital risk and a narrowing gender wage gap can explain the changes in hours ratios between single and married men and women

strategic information revelation we analyze the problem in which agents have non public information and are to play an asymmetric information game the agents may reveal some or all of their information to other agents prior to playing this game revelation is via exogenously specified certifiable statements the equilibria resulting from various revelation strategies are used to determine equilibrium revelation of information sufficient conditions are provided for complete revelation of all private information a number of examples are provided illustrating when revelation will or will not occur in commonly analyzed games many economic problems are characterized by the presence of both strategic behaviour on the part of individuals and by asymmetric information models encompassing both of these characteristics have been used successfully to examine questions in many fields usually using the concept of bayesian nash equilibrium as the solution concept typically the agents information is given exogenously and is fixed throughout the analysis modelling the information structure as static is appropriate for some problems but not for all in particular situations that are inherently dynamic most economic encounters allow for some interchange between the agents before the outcome is settled irrevocably in such circumstances it is possible that at least one or more of the agents possessing non public information may be able to reveal part or all of his information to one or all of the other agents in the economy during the course of their contact to the extent that such a communication is believed by the other agents the priors of the other agents will change and we will have what is in essence a new asymmetric information game new in

deliberation preference uncertainty and voting rules a deliberative committee is a group of at least two individuals who first debate about what alternative to choose prior to these same individuals voting to determine the choice we argue first that uncertainty about individuals private preferences is necessary for full information sharing and second demonstrate in a very general setting that the condition under which unanimity can support full information revelation in debate amounts to it being common knowledge that all committee members invariably share identical preferences over the alternatives it follows that if ever there exists an equilibrium with fully revealing debate under unanimity rule there exists an equilibrium with fully revealing debate under any voting rule moreover the converse is not true of majority rule if there is uncertainty about individuals preferences

cheap talk with two audiences these problems have in common a simple structure an informed sender says something to two interested but uninformed receivers who then take actions based on their beliefs these actions affect the sender as well as the receivers in this paper we study how costless nonverifiable claims cheap talk can affect these beliefs and hence the actions and how the incentives for truthful revelation to one receiver are affected by the presence of the other we then ask how welfare is affected by whether claims are made in public or in private as some of the above examples suggest public messages may be more credible than private messages addressed to either audience one possibility is that the presence of one audience can discipline the sender s relationship with the other we call this one sided

competence implies credibility the credibility of monetary policy under discretion has been traditionally linked to the central bank s conservatism we show that another trait of the central bank cb her competence at doing her job or reputation thereof can be just as important to make her policy credible and transparent we analyze a static barro and gordon 1983 s game where the effects of monetary policy depend on an unknown state of the economy the cb forms her own private and imprecise view of this state that she may announce to p in a cheap talk game to explain and motivate her policy intentions the precision of the noise in the cb s view measures her competence the more accurate her assessment the clearer an idea she has about what to do the fineness of the equilibrium message space measures monetary policy s transparency in any equilibrium of the cheap talk game the cb credibly announces one of finite inflation targets that differ by at least a multiple of the inflation bias competence ratio if this ratio is too large the cb can credibly communicate only the direction of monetary policy as the cb s competence rises and this ratio falls p knows that the cb puts increasing weight on pursuing her objective targets relative to surprising expectations to stimulate output therefore the equilibrium message space becomes finer a more competent cb is also less likely to erroneously observe extreme realizations of the shocks so she is more able tofine tune expectations at times of business as usual

rational debate and one dimensional conflict this paper studies repeated communication regarding a multidimensional collective decision in a large population when preferences coincide but beliefs about the consequences of the various decisions diverge it is shown under some specific assumptions that public communication causes the disagreement between beliefs either to vanish or to become one dimensional at the limit multidimensional disagreement indeed allows for many directions of communication including some that are orthogonal to the conflict along which agents can communicate credibly the possible convergence toward a one dimensional conflict where no further communication takes place may be related to the empirically observed geometry ofthe political conflict in many countries

on committees of experts a committee makes a decision on a project on behalf of the public members of the committee agree on the a priori value of the project and hold additional private information about its consequences they are experts who care about the value of the project and about being considered well informed before voting on the project members can exchange their private information simultaneously we show that reputational concerns make the a priori unconventional decision more attractive and lead committees to show a united front these results hold irrespective of whether information can be manipulated or not also reputational concerns induce members to manipulate information and vote strategically if their preferences differ considerably from those of the member casting the decisive vote our last result is that the optimal voting rule balances the quality of information exchange and the alignment of interests of the decisive voter with those of the public

when does a firm disclose product information a firm chooses a price and the product information it discloses to a consumer whose tastes are privately known we provide a necessary and sufficient condition on the match function for full disclosure to be the unique equilibrium outcome whatever the costs and prior beliefs about product and consumer types it allows for products with different qualities as well as some horizontal match heterogeneity with independently distributed product and consumer types full disclosure is always an equilibrium and a necessary and sufficient equilibrium condition is that all firm types earn at least the full disclosure profit

convergence results for unanimous voting abstract this paper derives a necessary condition for unanimous voting to converge to the perfect information outcome when voters are only imperfectly informed about the alternatives under some continuity assumptions the condition is also sufficient for the existence of a sequence of equilibria that exhibits convergence the requirement is equivalent to that found by milgrom 1979 econometrica47 679 688 for information aggregation in single prize auctions an example illustrates that convergence may be reasonably fast for small committees however if voters have common preferences unanimity is not the optimal voting rule unanimity rule makes sense only as a way to ensure minority views are respected journal of economic literature classification numbers d72 d82 d44

the market for news we investigate the market for news under two assumptions that readers hold beliefs which they like to see confirmed and that newspapers can slant stories toward these beliefs we show that on the topics where readers share common beliefs one should not expect accuracy even from competitive media competition results in lower prices but common slanting toward reader biases on topics where reader beliefs diverge such as politically divisive issues however newspapers segment the market and slant toward extreme positions yet in the aggregate a reader with access to all news sources could get an unbiased perspective generally speaking reader heterogeneity is more important for accuracy in media than competition per se

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

coordination in auctions with entry abstract we examine self enforcing bidder coordination in auctions in which bidding is costly conditions on the distribution of valuations are identified that guarantee multiple equilibria under slightly stronger conditions within the set of sunspot payoffs only those that are convex combinations of payoffs of extreme asymmetric equilibria are interim efficient for the bidders if preplay communication is possible every no communication equilibrium payoff is interim pareto dominated for the bidders by some cheap talk equilibrium payoff when the number of auctions is large communication equilibria exist that yield ex post efficient payoffs for the bidders almost surely journal of economic literatureclassification numbers d44 d82

pandering to persuade a principal chooses one of multiple projects or an outside option an agent is privately informed about the projects benets and shares the principal s preferences except for not internalizing her value from the outside option we show that for moderate outside option values strategic communication is characterized by pandering the agent biases his recommendation toward conditionally better looking projects even when both parties would be better o with some other project a project that has lower expected value can be conditionally better looking we develop some comparative statics of pandering pandering is also induced by an optimal mechanism without transfers

selective reporting of factual content by commercial media the authors study the market for factual content and examine whether competition increases or decreases its provision factual content is supplied by commercial media firms which observe a set of facts depicting the state of the world and selectively decide how to report them consumers value content that matches their opinion which incentivizes media firms to slant their reports by omitting certain facts novel features in the authors model include consumers ability to anticipate the media s incentives for slant and the requirement that all media stances must be supported by facts furthermore consumers find reports with more facts to be more convincing despite consumers ability to detect slant and their demand for factual support the research shows that competition results in consumers reading fewer facts and being unable to update their prior beliefs about the state of the world the authors also find that a monopoly medium may be more polarizing than competitive media and that polarized report

ignorance promotes competition an auction model with endogenous private valuations we study a situation in which an auctioneer wishes to sell an object toone of n risk neutral bidders with heterogeneous preferences theauctioneer does not know bidders preferences but has private informationabout the characteristics of the ob ject and must decide how muchinformation to reveal prior to the auction we show that the auctioneerhas incentives to release less information than would be efficient andthat the amount of information released increases with the level ofcompetition as measured by the number of bidders furthermore in aperfectly competitive market the auctioneer would provide the efficientlevel of information

persuasive puffery sellers often make claims about product strengths without providing evidence even though such claims are mere puffery we show that they can be credible because talking up any one strength comes at the implicit trade off of not talking up another potential strength puffery pulls in some buyers who value product attributes that are talked up or emphasized while pushing away other buyers who infer that the attributes they value are relative weaknesses when the initial probability of making a sale is low there are more potential buyers to pull in than to push away so puffery is persuasive overall this persuasiveness requires that buyers have some privacy about their preferences so that the seller does not completely pander to them more generally the results show how comparative cheap talk by an expert to a decision maker can be credible and persuasive in standard discrete choice models used throughout marketing economics and other disciplines

searching for stationarity purchasing power parity under the current float abstract using panel data methods we investigate long run purchasing power parity by testing for unit roots in real exchange rates of industrial countries under the current float the evidence against the unit root hypothesis is stronger for larger than for smaller panels for monthly than for quarterly data and when the german mark rather than the united states dollar is used as the base currency while we find that accounting for serial correlation considerably weakens the evidence against the unit root null the results as a whole are consistent with long run purchasing power parity

strategic communication with lying costs i study a model of strategic communication between an uninformed receiver and an informed but upwardly biased sender the sender bears a cost of lying or more broadly of misrepresenting his private information the main results show that inflated language naturally arises in this environment where the sender almost always claims to be of a higher type than he would with complete information regardless of the intensity of lying cost there is incomplete separation with some pooling on the highest messages the degree of language inflation and how much information is revealed depend upon the intensity of lying cost the analysis delivers a framework to span a class of cheap talk and verifiable disclosure games unifying the polar predictions they make under large conflicts of interest i use the model to discuss how the degree of manipulability of information can affect the trade off between delegation and communication copyright 2009 wiley blackwell

co ordination spillovers and cheap talk abstract we analyze the role of cheap talk in two player games with one sided incomplete information we identify conditions under which 1 players can fully communicate and coordinate on efficient nash equilibria of the underlying complete information game and 2 players cannot communicate so cheap talk does not alter the equilibrium set of the bayesian game we present examples that illustrate several issues that arise when there is two sided incomplete information journal of economic literature classification numbers c72 d82

using privileged information to manipulate markets insiders gurus and credibility access to private information is shown to generate both the incentives and the ability to manipulate asset markets through strategically distorted announcements the fact that privileged information is noisy interferes with the public s attempts to learn whether such announcements are honest it allows opportunistic individuals to manipulate prices repeatedly without ever being fully found out this leads us to extend sobel s 1985 model of strategic communication to the case of noisy private signals our results show that when truthfulness is not easily verifiable restrictions on trading by insiders may be needed to preserve the integrity of information embodied in prices