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Manufacturer suggested retail prices, loss aversion and competition

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  • Fabrizi, Simona
  • Lippert, Steffen
  • Puppe, Clemens
  • Rosenkranz, Stephanie

Abstract

We study a model of vertical relations with imperfect retail competition in which a fraction of the consumers display reference-dependent demand with respect to the manufacturer’s suggested retail price. We demonstrate that in equilibrium the suggestion will either be undercut or complied with by the retailers, but never surpassed: undercutting occurs if competition is fierce, the impact from consumers affected by reference-dependent preferences is significant, and high price suggestions are credible; compliance occurs otherwise. We provide comparisons, and discuss implications, for consumer surplus for the scenarios with suggested retail prices, without vertical restraints and with resale price maintenance.

Suggested Citation

  • Fabrizi, Simona & Lippert, Steffen & Puppe, Clemens & Rosenkranz, Stephanie, 2016. "Manufacturer suggested retail prices, loss aversion and competition," Journal of Economic Psychology, Elsevier, vol. 53(C), pages 141-153.
    • Handle: RePEc:eee:joepsy:v:53:y:2016:i:c:p:141-153
    DOI: 10.1016/j.joep.2016.02.001
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    3. Fatas, Enrique & Restrepo-Plaza, Lina, 2022. "When losses can be a gain. A large lab-in-the-field experiment on reference dependent forgiveness in Colombia," Journal of Economic Psychology, Elsevier, vol. 88(C).

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    More about this item

    Keywords

    3900; 3920; Reference-dependent preferences; Loss aversion; Suggested retail prices; Resale price maintenance; Vertical restraints;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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