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Making Sense of Nonbinding Retail-Price Recommendations

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  • Stefan Buehler
  • Dennis L. Gäertner

Abstract

We model retail-price recommendations (RPRs) as a communication device in vertical supply relations with private manufacturer information on production costs and consumer demand. With static trade, RPRs are irrelevant, and the equilibrium outcome is inefficient. With repeated trade, RPRs can become part of a relational contract, communicating private information from manufacturer to retailer that is indispensable for maximizing joint surplus. We show that this contract is self-enforcing if the retailer's profit is independent of production costs and punishment strategies are chosen appropriately. The predictions of our analysis are consistent with the available empirical evidence. (JEL D21, D24, L11, L14, L22, L60, L81)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.103.1.335
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 103 (2013)
Issue (Month): 1 (February)
Pages: 335-59

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Handle: RePEc:aea:aecrev:v:103:y:2013:i:1:p:335-59

Note: DOI: 10.1257/aer.103.1.335
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References

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Cited by:
  1. Ilja Neustadt & Peter Zweifel, 2009. "Economic Well-Being, Social Mobility, and Preferences for Income Redistribution: Evidence from a Discrete Choice Experiment," Working Papers 0909, University of Zurich, Socioeconomic Institute, revised Jan 2010.
  2. Maurus Rischatsch & Maria Trottmann, 2009. "Physician dispensing and the choice between generic and brand-name drugs – Do margins affect choice?," Working Papers 0911, University of Zurich, Socioeconomic Institute.
  3. Dmitry Lubensky, 2011. "A Model of Recommended Retail Prices," Working Papers 2011-06, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  4. Maurus Rischatsch, 2009. "Simulating WTP Values from Random-Coefficient Models," Working Papers 0912, University of Zurich, Socioeconomic Institute.

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