Selling with Evidence
Short link to this article : https://bit.ly/2JdOGPv
Frédéric Koessler and Vasiliki Skreta
Seen from a traditional perspective, the information economy teaches us that information asymmetry between a seller and a buyer creates a problem called “adverse selection”. If the quality of the good cannot be verified, then only bad quality goods will be present on the market because prices are too low for a vendor who offers quality goods. It is the famous Akerlof second-hand car market (1970). Today, a seller has a number of channels through which the characteristics of her products can be disclosed (advertising, samples, trial periods, labelling, witnesses, test results, technical reports, etc.) in order to influence consumer choices. If she is selling a quality product, then she is encouraged to demonstrate a maximum of characteristics in order to be able to sell it at a higher price. When information disclosure costs are low, only a vendor offering very bad quality goods is encouraged to hide her information. If rational consumers buy the products even so, then they do so knowingly.
In this article, Koessler and Skreta show that the sophistication of sales procedures can lead the seller of a quality good not to tell the buyer everything. Through elaborate sales procedures, the model they present assumes that the seller is no longer obliged to propose a fixed price. She can propose a quote for a fee to estimate the price of the service. She can also charge a fee for a visit, a trial or specialist advice, before naming a price for a good or a service, and even offer discounts or additional charges that depend on information that is not available at the time of the signing of the sales contract (1). The article offers a theoretical negotiation model in which the seller is informed of the characteristics of her good, and consumers know their preferences for the good’s characteristics. The good’s value for each party depends on information kept private by both seller and buyer (called interdependent values). The seller voluntarily reveals information to consumers and strategically chooses a sales mechanism: a fixed price, fees for information followed by a purchase price, a sales contract contingent on promises of discounts, etc. The relationship between buyer and seller is studied in the generalised “informed principal” model (2) where the principal’s (the vendor’s) information is verifiable. The possible sales mechanisms are characterised according to the vendor’s capacity to certify her information, the beliefs of the parties involved, and the value they accord to the product. A sales mechanism in equilibrium, that is, a mechanism that is chosen by the seller and accepted by the buyer, is identified. The article shows that this equilibrium mechanism maximises the seller’s ex-ante profit. Generally, it is not the same as the allocation obtained with a fixed price, even when all consumers agree on the idea of quality. Thus, while results in the existing literature predict that a seller in a monopoly situation is always encouraged to reveal verifiable information about quality, this article reveals that a seller who has access to more complex selling procedures will have a strategic interest in not revealing all the characteristics of her product, even to the most sceptical consumers.
(1) For example, the results of clinical trials, gaining a particular label the result of a ranking, or the failure/defect of a part.
(2) The informed principal model is a game in which the party who offers a contract (the principal) holds private information that can be revealed indirectly to the agent (the buyer) via the strategic choice of the contract (see, for example, Myerson, 1983, Maskin et Tirole, 1990).
Original title of the article : Selling with Evidence
Published in : CEPR Discussion Paper No. DP12049
Available at : https://ssrn.com/abstract=2971910
© nd3000 - Fotolia.com