Tailored Cheap Talk: The Effects of Privacy Policy On Ad Content and Market Outcomes

Abstract

We consider a persuasion setting in which the sender of a message tries to elicit a desired action from a receiver by means of a compelling argument. In order to understand which arguments may indeed be compelling, the sender can use information about the receiver's preferences prior to the communication stage. We find that when the sender's motives are transparent to the receiver, communication can only be influential if the sender is not well informed about the receiver's preferences. The sender prefers an interior level of information quality, while the receiver prefers complete privacy unless disclosure is necessary to induce communication. We also find that the parties may fail to trade at intermediate communication cost levels. In other cases, the content and cost of communication can affect market outcomes simultaneously. Finally, in general, the sender's first-best outcome involves pooling with unattractive sender types: he prefers to stay relatively guarded about aspects he is knowledgeable of in order to hinder the receiver's discernment when topics he does not master are touched upon. Our results are discussed in the contexts of matching markets, including online advertising, sales, expert advice, dating and job search.

Keywords: Cheap-Talk, Privacy, Tailored Communication, Advertising

JEL Classification: D82, D83, M37