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Competition with list prices

Author

Listed:
  • Haan, Marco A.
  • Heijnen, Pim
  • Obradovits, Martin

Abstract

Retail prices in stores are often lower than widely advertised list prices. We study the competitive role of such list prices in a homogeneous product duopoly where firms first set list prices before setting possibly reduced retail prices. Building on Varian (1980), we assume that some consumers observe no prices, some observe all prices, and some only observe the more salient list prices. We show that when the latter group chooses myopically, firms' ability to use list prices lowers average transaction prices. This effect is weakened when these consumers are rational. The possibility to use list prices facilitates collusion.

Suggested Citation

  • Haan, Marco A. & Heijnen, Pim & Obradovits, Martin, 2023. "Competition with list prices," Games and Economic Behavior, Elsevier, vol. 140(C), pages 502-528.
    • Handle: RePEc:eee:gamebe:v:140:y:2023:i:c:p:502-528
    DOI: 10.1016/j.geb.2023.04.012
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    More about this item

    Keywords

    List prices; Recommended retail prices; Price competition; Price dispersion; Advertising;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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