A Model of Recommended Retail Prices
AbstractManufacturers frequently use list prices, suggested retail prices, or other similar forms of non-binding public price recommendations. Despite the prevalence of this practice, why manufacturers make these recommendations and what effect they have on actual prices is still not well understood. I present a model in which price recommendations convey information to consumers about aggregate market conditions. The manufacturer uses recommendations to directly affect consumers' search decisions and thus to indirectly affect the prices set by retailers. The manufacturer faces a tradeoff when influencing search: inducing lower reservation prices reduces retailer markups but also inhibits the manufacturer's ability to extract surplus from consumers with a high willingness to pay. I show that the manufacturer can credibly provide information through cheap talk. Furthermore, I find that a ban on recommendations can be welfare reducing, harming both consumers and the manufacturer. Lastly, I argue that price recommendations are not simply a substitute for price restraints and allow the manufacturer to achieve outcomes that are not attainable with resale price maintenance alone.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2011-06.
Date of creation: Aug 2011
Date of revision:
Contact details of provider:
Postal: 1309 East Tenth Street, Room 451, Bloomington, IN 47405-1701
Web page: http://www.bus.indiana.edu/bepp/
More information through EDIRC
Find related papers by JEL classification:
- L0 - Industrial Organization - - General
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-08 (All new papers)
- NEP-COM-2012-05-08 (Industrial Competition)
- NEP-MKT-2012-05-08 (Marketing)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John Thanassoulis & David Gill, 2010. "The Optimal Marketing Mix of Posted Prices, Discounts and Bargaining," Economics Series Working Papers 479, University of Oxford, Department of Economics.
- Stefan Buehler & Dennis L. Gaertner, 2009.
"Making Sense of Non-Binding Retail-Price Recommendations,"
SOI - Working Papers
0902, Socioeconomic Institute - University of Zurich.
- Stefan Buehler & Dennis L. GÃ¤ertner, 2013. "Making Sense of Nonbinding Retail-Price Recommendations," American Economic Review, American Economic Association, vol. 103(1), pages 335-59, February.
- GÃ¤rtner, 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.
- Stefan Bühler & Dennis L. Gärtner, 2009. "Making Sense of Non-Binding Retail-Price Recommendations," University of St. Gallen Department of Economics working paper series 2009 2009-02, Department of Economics, University of St. Gallen.
- Stefan Buehler & Dennis L. Gärtner, 2010. "Making Sense of Non-Binding Retail-Price Recommendations," CESifo Working Paper Series 3024, CESifo Group Munich.
- G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
- C. Puppe & S. Rosenkranz, 2006.
"Why suggest non-binding retail prices ?,"
06-10, Utrecht School of Economics.
- Huanxing Yang & Lixin Ye, 2008. "Search with learning: understanding asymmetric price adjustments," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 547-564.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rick Harbaugh).
If references are entirely missing, you can add them using this form.