Commitment and Cheap Talk in Search Deterrence : Exploding Offer vs Buy-Now Discount

This paper theoretically and experimentally investigates two prevailing search deterrence tactics, exploding offer and buy-now discount, under various commitment conditions. An exploding offer is a take-it-or-leave-it offer that expires if the recipient does not accept before a given deadline. A buy-now discount is a high-pressure tactic that specifies a higher buy-later price so as to encourage early transactions. In an experimental setting where the two tactics are predicted to generate the same equilibrium outcome under full commitment, we find exploding offers are implemented more optimally and are more effective in search deterrence. Consistent with the theory, the removal of the seller’s power to commit sharply decreases the frequency of exploding offers while leaving the use of buy-now discounts largely unaffected. Allowing a seller to cheap talk can significantly influence the buyer’s search and return decisions. Cheap talk is most used to deter search in the exploding offer game but to induce return in the buy-now discount game. Such a different cheap talk strategies can be largely explained by our behavioral model, where we introduce a behavioral type of buyers who naively believe the seller’s cheap talk.