Cheap Talk, Coordination, and Entry

Abstract

We show how costless, nonbinding, nonverifiable communication (cheap talk) can achieve partial coordination among potential entrants into a natural-monopoly industry, where the payoffs are qualitatively like the battle of the sexes. The analysis would apply equally in other economic situations with such payoffs, for example, bargaining under complete information or choosing compatibility standards. While cheap talk helps achieve asymmetric coordination in a symmetric mixed-strategy equilibrium, it cannot achieve complete coordination if the game involves even a small amount of conflict.