Tailored Cheap Talk: The Effects of Privacy Policy on Ad Content and Market Outcomes

Tailored Cheap Talk: The Effects of Privacy Policy on Ad Content and Market Outcomes

By
Pedro M. Gardete, Yakov Bart
Marketing Science (forthcoming).
2018

We consider a cheap-talk setting in which the sender can use information about the receiver’s preferences to tailor communication. Better information increases the persuasion ability of the sender, but also results in receiver skepticism. When the sender’s motives are transparent to the receiver, trade always relies on the sender not being too well-informed about the receiver’s preferences. In the case of horizontal matching, trade breaks down when communication costs are intermediate, whenever the agents’ valuations differ sufficiently. Moreover, the cost and content of the communication may affect market outcomes through concurrent mechanisms.

Both sender and social planner prefer the maximum amount of information that allows trade, whereas the receiver prefers complete privacy, unless information revelation is necessary to induce trade. Finally, the sender’s first-best strategy involves pooling with undesirable sender types. The implications are discussed in the contexts of matching markets, including online advertising, sales, dating and job search.