Why Suggest Non-Binding Retail Prices?
AbstractWe 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 TverskyÕs 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 InfoPaper provided by Utrecht School of Economics in its series Working Papers with number 06-10.
Length: 18 pages
Date of creation: May 2006
Date of revision:
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Other versions of this item:
- D4 - Microeconomics - - Market Structure and Pricing
- D10 - Microeconomics - - Household Behavior - - - General
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-23 (All new papers)
- NEP-COM-2007-01-23 (Industrial Competition)
- NEP-UPT-2007-01-23 (Utility Models & Prospect Theory)
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