Chapter 20 Price Signaling and “Cheap Talk” in Laboratory Posted Offer Markets

This chapter focuses on identifying the marginal impact of price signaling, holding all other environmental and institutional factors constant. Although price signaling often increases transaction prices, this increase is very often temporary. Equilibrium behavior may be unaffected by non-binding price signaling in many environments. Price increases due to price signaling are more likely when sellers compete in multiple markets. Conspiracies are more successful when a subset of sellers forego short term gains by repeatedly offering supercompetitive prices. The market impact of price signaling depends on the signaling language available to sellers. Very restrictive language (e.g., one price proposal by one seller per period) does not have a lasting impact on prices. By contrast, multiple-round structured signaling in which many sellers per period can propose price changes with specific responses required of other sellers can generate persistently higher prices compared to free form price signaling.