When Does Communication Improve Coordination?

Abstract

We study costless pre-play communication of intentions among inexperienced players. Using the level-k model of strategic thinking to describe players' beliefs, we fully characterize the effects of pre-play communication in symmetric 2 2 games. One-way communication weakly increases coordination on Nash equilibrium outcomes, although average payoffs sometimes decrease. Twoway communication further improves payoffs in some games, but is detrimental in others. Moving beyond the class of symmetric 2 2 games, we nd that communication facilitates coordination in common interest games with positive spillovers and strategic complementarities, but there are also games in which any type of communication hampers coordination. JEL: C72. Keywords: Pre-play communication, cheap talk, coordination, level-k, cognitive hierarchy.Some people nd themselves in a new strategic situation. How can they best coordinate their actions? Since they cannot rely on precedence, maybe they should start talking? If so, what are the exact reasons why communication helps? These fundamental questions crop up in many disciplines, including evolutionary biology, psychology, political science, and economics. 1 Farrell (1987, 1988) and Matthew Rabin (1990Rabin ( , 1994 provide formal analyses of costless communication, or cheap talk, as a means to convey intentions and thereby improve coordination among rational players in games with complete information. 2 While the models are insightful, we argue that they make problematic assumptions concerning players' beliefs, and that recent models of strategic thinking offer alternative assumptions that better t our intuitions and the available experimental evidence.To put our arguments into perspective, let us brie y review some of the literature. Farrell (1987) studies communication in a Battle of the Sexes game (Figure 1). Farrell assumes that behavior will correspond to the symmetric mixed strategy Nash equilibrium if players cannot communicate. He also assumes that message pairs ."H ";"L"/ and ."L";"H "/ that are consistent with a pure strategy equilibrium will induce play of that equilibrium. Based on these assumptions, he shows that with two-way communication there are better symmetric mixed strategy equilibria than the no-communication equilibrium. Payoffs improve with the number of communication Ellingsen:

Coordination with communication under oath

“…One-way communication between partners is generally found to improve efficiency in coordination games by reducing strategic uncertainty. For an insightful review of related literature see, e.g., Crawford (1998); Ellingsen and Östling (2010).…”

Pre-play communication with forgone costly messages: experimental evidence on forward induction

“…We also checked plausible alternative explanations for our experimental results, including level-k reasoning (Ellingsen and Östling, 2010) and quantal response equilibrium (McKelvey, R., and Palfrey, T., 1995; Anderson, S., Goeree, J., and Holt, C., 2001), and find that these cannot account for our results. 20 We can also rule out that subjects are simply selecting the efficient equilibrium, as there is no tendency toward efficient play when either messages are unavailable or are available but unreasonably costly.…”

“…Hurkens (1996), however, shows that an analogous result does hold in this case if one uses Basu 18 Weak-link game have been experimentally studied by for example Van Huyck et al (1990), Weber et al (2001), Weber (2006) and Brandts and Cooper (2006), and represent useful models of varied economic activity, such as investment or production under complementarities (Bryant, 1983;Hirschleifer, 1983;Knez and Camerer, 1994). 19 For theoretical analyses of the effectiveness of unilateral vs. multilateral communication, see Ellingsen and Östling (2010). In experiments, Cooper et al (1992) find that two-sided communication is more efficiency enhancing than one-sided communication.…”

Learning, Words and Actions: Experimental Evidence on Coordination-Improving Information

“…They formalize the idea originally introduced by Crawford (1998) that communication provides reassurance to the receiver about the degree of rationality of the sender. Ellingsen and Östling (2010) relax the assumption that players believe with probability 1 that their opponents are rational. The maintained assumption is that players have a weak (lexicographic) preference for being honest -i.e.…”