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Why Suggest Non‐Binding Retail Prices?

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  • CLEMENS PUPPE
  • STEPHANIE ROSENKRANZ

Abstract

We provide a simple behavioral explanation of why manufacturers frequently announce non-binding suggested retail prices for their products. Our model is based on the assumption that once the actual price for a product exceeds its suggested retail price, the marginal propensity to consume suddenly jumps downward. This property of individual demand corresponds to Kahneman and Tversky’s concept of loss aversion. We show that it may induce a monopolistic retailer to set the price equal to the suggested retail price in equilibrium, although the latter price is nonbinding. This, in turn, leads to a shift of profits from the retailer to the manufacturer.

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Bibliographic Info

Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 78 (2011)
Issue (Month): 310 (04)
Pages: 317-329

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Handle: RePEc:bla:econom:v:78:y:2011:i:310:p:317-329

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References

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  1. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  2. Bruno Jullien & Patrick Rey, 2007. "Resale price maintenance and collusion," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 983-1001, December.
  3. S. Rosenkranz, 2003. "The Manufacturer's Suggested Retail Price," Working Papers 03-05, Utrecht School of Economics.
  4. Frank Mathewson & Ralph Winter, 1998. "The Law and Economics of Resale Price Maintenance," Review of Industrial Organization, Springer, vol. 13(1), pages 57-84, April.
  5. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  6. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
  7. B. Douglas Bernheim & Michael D. Whinston, 1985. "Common Marketing Agency as a Device for Facilitating Collusion," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 269-281, Summer.
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Cited by:
  1. Babur De los Santos & In Kyung Kim & Dmitry Lubensky, 2013. "Do MSRPs Decrease Prices?," Working Papers 2013-13, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  2. Gärtner, Dennis L & Buehler, Stefan, 2009. "Making Sense of Non-Binding Retail-Price Recommendations," Department of Economics, Working Paper Series qt51z312zt, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Mark Armstrong & Yongmin Chen, 2012. "Discount Pricing," Economics Series Working Papers 605, University of Oxford, Department of Economics.
  4. Dmitry Lubensky, 2013. "A Model of Recommended Retail Prices," Working Papers 2013-14, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  5. Lisa Bruttel, 2014. "The Effects of Non-binding Retail-price Recommendations on Consumer and Retailer Behavior," TWI Research Paper Series 93, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
  6. 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.

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