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 Tverskyâ€™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.
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 Utrecht School of Economics in its series Working Papers with number 06-10.
Length: 21 pages
Date of creation: May 2006
Date of revision:
Contact details of provider:
Postal: P.O. Box 80125, NL-3508 TC Utrecht
Phone: +31 30 253 9800
Fax: +31 30 253 7373
Web page: http://www.uu.nl/EN/faculties/leg/organisation/schools/schoolofeconomicsuse/Pages/default.aspx
More information through EDIRC
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)
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.:
- 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.
- 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.
- Milgrom, P. & Shannon, C., 1991.
"Monotone Comparative Statics,"
11, Stanford - Institute for Thoretical Economics.
- Bruno Jullien & Patrick Rey, 2007.
"Resale price maintenance and collusion,"
RAND Journal of Economics,
RAND Corporation, vol. 38(4), pages 983-1001, December.
- S. Rosenkranz, 2003.
"The Manufacturer's Suggested Retail Price,"
03-05, Utrecht School of Economics.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- 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.
- 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.
- Stefan Buehler & Dennis L. Gaertner, 2009. "Making Sense of Non-Binding Retail-Price Recommendations," SOI - Working Papers 0902, Socioeconomic Institute - University of Zurich.
- 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.
- Armstrong, Mark & Chen, Yongmin, 2012.
39074, University Library of Munich, Germany.
- 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.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marina Muilwijk).
If references are entirely missing, you can add them using this form.