What Is Cheap Talk?
In game theory, cheap talk refers to communication between players that does not directly affect the payoffs of the game. It is "cheap" because it is costless and non-binding — players can say anything without penalty, and others are free to ignore it.
Key Features
- No direct impact on outcomes or payoffs
- Messages are costless to send
- Not enforceable or verifiable
- May still influence behavior if credible
Example Scenario
Imagine two firms deciding whether to enter a new market. Before acting, they exchange opinions about market demand. Since these statements don’t change costs or revenues, they constitute cheap talk. Whether either firm heeds the other’s advice depends on incentives and past trust.
Relevance in Economics
Cheap talk models help economists understand when and how communication can lead to coordination, even without contracts or penalties. It appears in studies of signaling, negotiation, and information transmission.