Product announcement and reputation in a cheap talk game

Abstract

Firms keep introducing new products in markets. In making a buy-or-wait decision, consumers rely on information provided by firms. In a cheap-talk game model (i.e., Crawford and Sobel (1982)), we identify a simple informative equilibrium, in which firms make a discrete announcement, either low or high quality, even though product quality space is continuous. We characterize the equilibrium properties and evaluate its welfare effects.