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Do MSRPs Decrease Prices?

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Author Info

  • Babur De los Santos

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

  • In Kyung Kim

    (Department of Economics, Indiana University)

  • Dmitry Lubensky

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

Abstract

The nature of manufacturer’s suggested retail prices (MSRP) and whether their effect is pro or anticompetitive is not well understood. Opposing theories suggest that manufacturers may attempt to reduce retail prices to deter double marginalization or increase retail prices to foster upstream or downstream collusion. We exploit a policy experiment in South Korea in which MSRPs were banned and then reinstated one year later to estimate their impact on prices. The ban increased prices by 2.3 percent and the reinstatement decreased prices by 2.6 percent, demonstrating the pro-competitive effect of MSRPs. Based on a lack of evidence that recommendations act as binding price ceilings, we offer an alternative explanation in which MSRPs provide information to searching consumers. We demonstrate that the removal of recommendations can reduce search and increase prices.

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File URL: http://www.bus.indiana.edu/riharbau/RePEc/iuk/wpaper/bepp2013-13-delossantos-kim-lubensky.pdf
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Bibliographic Info

Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2013-13.

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Date of creation: Dec 2013
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Handle: RePEc:iuk:wpaper:2013-13

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Keywords: recommended retail price; suggested retail price; list price; non-binding price; search with uncertainty; vertical restraints; resale price maintenance;

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References

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  1. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
  2. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
  3. Clemens Puppe & Stephanie Rosenkranz, 2011. "Why Suggest Non‐Binding Retail Prices?," Economica, London School of Economics and Political Science, vol. 78(310), pages 317-329, 04.
  4. Stefan Buehler & Dennis L. Gäertner, 2013. "Making Sense of Nonbinding Retail-Price Recommendations," American Economic Review, American Economic Association, vol. 103(1), pages 335-59, February.
  5. Klein, Benjamin & Murphy, Kevin M, 1988. "Vertical Restraints as Contract Enforcement Mechanisms," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 265-97, October.
  6. Michael Rothschild, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown: A Summary," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 1, pages 293-294 National Bureau of Economic Research, Inc.
  7. 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.
  8. Rothschild, Michael, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 689-711, July/Aug..
  9. 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.
  10. Jose Luis Moraga-Gonzalez & Zsolt Sandor & Matthijs R. Wildenbeest, 2010. "Nonsequential Search Equilibrium with Search Cost Heterogeneity," Working Papers 2010-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
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  1. Do MRSPs (manufacturer suggested retail prices) have an impact on prices?
    by Economic Logician in Economic Logic on 2014-01-13 15:49:00
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Cited by:
  1. 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.

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