2.1 When does cheap talk have an effect? When is it ineffective? Which of the following examples of cheap talk will most likely have an effect?

Explain your answers.

a. Boeing and Airbus, the two dominant producers of large passenger planes, realize that both their profits would increase if they both submitted high-price offers to airline companies looking to purchase planes. Boeing’s managers announce that going forward they will submit only high-price offers that allow Boeing to make a large profit.

b. You are the manager of an oil exploration company. You have won an auction for a potential oil field that is immediately adjacent to a field owned by a competitor. You are considering whether to test drill on your field when your competitor’s managers announce plans to test drill on their field very near your property.

c. You are an executive for a local home builder. You and another competitor own land on which you could build either a few high-end homes or many affordable homes.

You believe that if you both build high-end homes or both build affordable homes, the profits of both firms will be lower because the two of you will glut the market. Your rival’s managers announce that they will build affordable homes on their property.