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Making Sense of Non-Binding Retail-Price Recommendations

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  • Stefan Buehler
  • Dennis L. Gärtner

Abstract

We model non-binding retail-price recommendations (RPRs) as a communication device facilitating coordination in vertical supply relations. Assuming both repeated vertical trade and asymmetric information about production costs, we show that RPRs may be 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. We also extend our analysis to settings where consumer demand is variable or depends directly on the manufacturer’s RPRs.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3024.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3024

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Keywords: vertical relationships; relational contracts; asymmetric information; price recommendations;

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Citations

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Cited by:
  1. Dmitry Lubensky, 2011. "A Model of Recommended Retail Prices," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2011-06, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  2. Maurus Rischatsch, 2009. "Simulating WTP Values from Random-Coefficient Models," SOI - Working Papers, Socioeconomic Institute - University of Zurich 0912, Socioeconomic Institute - University of Zurich.
  3. Lisa Bruttel, 2014. "The Effects of Non-binding Retail-price Recommendations on Consumer and Retailer Behavior," TWI Research Paper Series, Thurgauer Wirtschaftsinstitut, Universität Konstanz 93, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
  4. Babur De los Santos & In Kyung Kim & Dmitry Lubensky, 2013. "Do MSRPs Decrease Prices?," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2013-13, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  5. Ilja Neustadt & Peter Zweifel, 2009. "Economic Well-Being, Social Mobility, and Preferences for Income Redistribution: Evidence from a Discrete Choice Experiment," SOI - Working Papers, Socioeconomic Institute - University of Zurich 0909, Socioeconomic Institute - University of Zurich, revised Jan 2010.
  6. Dmitry Lubensky, 2013. "A Model of Recommended Retail Prices," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2013-14, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  7. Maurus Rischatsch & Maria Trottmann, 2009. "Physician dispensing and the choice between generic and brand-name drugs – Do margins affect choice?," SOI - Working Papers, Socioeconomic Institute - University of Zurich 0911, Socioeconomic Institute - University of Zurich.

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