Question

When does cheap talk have an effect? When is it ineffective? Which of the following examples of cheap talk will most likely have an effect? Explain your answers.

a. Boeing and Airbus, the two dominant producers of large passenger planes, realize that both their profits would increase if they both submitted high-price offers to airline companies looking to purchase planes. Boeing’s managers announce that going forward they will submit only high-price offers that allow Boeing to make a large profit.

b. You are the manager of an oil exploration company. You have won an auction for a potential oil field that is immediately adjacent to a field owned by a competitor. You are considering whether to test drill on your field when your competitors managers announce plans to test drill on their field very near your property.

c. You are an executive for a local home builder. You and another competitor own land on which you could build either a few high-end homes or many affordable homes. You believe that if you both build high-end homes or both build affordable homes, the profits of both firms will be lower because the two of you will glut the market. Your rival’s managers announce that they will build affordable homes on their property.

Answer 1

Cheap Talks:-

In game theory, cheap talk is communication between players that does not directly affect the payoffs of the game. Providing and receiving information is free. ... To give a formal definition, cheap talk is communication that is: costless to transmit and receive.

Cheap Talks are effective when a player only learns the choice of another player if he or she undertakes a risky choice. While costless preplay communication (cheap talk) has been found to be effective in experimental coordination games, participants have typically learned both own payoffs and the other player's action. Are both of these components necessary for cheap talk to be effective? In our 2×2 stag hunt game, the safe choice always yields the same payoff, so that information about payoffs does not always identify the other player's action. We vary whether information is provided about the other person's play, and whether costless one-way messages can be sent before action choices are made. We find that information provision about the other person's play increases coordination when there are messages, but otherwise has no effect.

The cheap talk literature suggests that cheap talk’s effectiveness may be sensitive to script length, subject experience with the good, and payment amounts. Therefore, further research is necessary to develop a better understanding of underlying causes of hypothetical bias and how it is affected by cheap talk. We conclude that cheap talk may have the potential to achieve its objective, but the approach should be used with caution.

In above question example of boeing and airbus best support the example of cheap talks since, cheap talks are indirect messages sent to your rivals and announcement of increase in price is a message to a rival to increase his as well for earming more profit and gains and payoffs of the competitors are unaffected in this way