Cheap Talk with Multiple Strategically Interacting Audiences: An Experimental Study

We consider a cheap-talk setting that mimics the situation where an incumbent firm (the sender) is endowed with incentives to understate the true size of the market demand to two potential entrants (the receivers). Although our experimental data reveals that the senders’ messages convey truthful information and this is picked up by the receivers, this overcommunication (relative to standard theoretical prediction) does not enhance efficient entry levels (and payoffs) to beyond what can be achieved without communication. The reason is that receivers fail to optimally translate the information received in their entry decision, possibly due to overcautiousness.