Buying from the Babbling Newsvendor: Availability Information and Cheap Talk

40 Pages Posted: 20 Oct 2008

Date Written: August 3, 2008


Provision of real-time information by a firm to its customers has become prevalent in recent years in both the service and retail sectors. In this paper, we study a retail operations model where customers are strategic in both their actions and in the way they interpret information, while the retailer is strategic in the way it provides information. This paper focuses on the ability (or the lack thereof) to communicate credibly unverifiable information. We develop a game-theoretic framework to study this type of communication and discuss the equilibrium language emerging between the retailer and its customers. We show that for a single-retailer setting, the equilibrium language that emerges carries no information. In this sense, a single-retailer providing information on its own cannot create any credibility with the customers. We explore several remedies so that the firm can credibly disclose availability information to its customers. While in these remedies we show that the firm may be able to reveal complete information, the firm would prefer to shade some information and use intentional vagueness.

Keywords: Cheap Talk, Inventory, Information, Availability, Signaling, Newsvendor

JEL Classification: C71, L15

Suggested Citation

Allon, Gad and Bassamboo, Achal, Buying from the Babbling Newsvendor: Availability Information and Cheap Talk (August 3, 2008). Available at SSRN: or

Gad Allon (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Achal Bassamboo

Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS) ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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