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Making Sense of Non-Binding Retail-Price Recommendations

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  • Gärtner, Dennis L
  • Buehler, Stefan

Abstract

We model non-binding retail-price recommendations (RPRs) as a communication device facilitating coordination in vertical supply relations. Assuming both repeated vertical trade and asymmetric information about production costs, we show that RPRs may be part of a relational contract, communicating private information from manufacturer to retailer that is indispensable for maximizing joint surplus. We show that this contract is self-enforcing if the retailer’s profit is independent of production costs and punishment strategies are chosen appropriately. We also extend our analysis to settings where consumer demand is variable or depends directly on the manufacturer’s RPRs. Keywords: vertical relationships, relational contracts, asymmetric information, price recommendations. JEL Classification: D23; D43; L14; L15.

Suggested Citation

  • Gärtner, 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.
  • Handle: RePEc:cdl:econwp:qt51z312zt
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    References listed on IDEAS

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    Cited by:

    1. Ilja Neustadt & Peter Zweifel, 2009. "Economic Well-Being, Social Mobility, and Preferences for Income Redistribution: Evidence from a Discrete Choice Experiment," SOI - Working Papers 0909, Socioeconomic Institute - University of Zurich, revised Jan 2010.
    2. 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.
    3. Bertini, Marco & Buehler, Stefan & Halbheer, Daniel, 2018. "Consumer Resistance0F," Economics Working Paper Series 1804, University of St. Gallen, School of Economics and Political Science.
    4. repec:eee:indorg:v:53:y:2017:i:c:p:353-370 is not listed on IDEAS
    5. Sahuguet, Nicolas & Walckiers, Alexis, 2013. "Selling to a cartel of retailers: a model of hub-and-spoke collusion," CEPR Discussion Papers 9385, C.E.P.R. Discussion Papers.
    6. 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.
    7. Lømo, Teis Lunde & Ulsaker, Simen Aardal, 2016. "Promotional allowances," Working Papers in Economics 08/16, University of Bergen, Department of Economics.
    8. Maurus Rischatsch, 2009. "Simulating WTP Values from Random-Coefficient Models," SOI - Working Papers 0912, Socioeconomic Institute - University of Zurich.
    9. 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.
    10. Alp Atakan & Levent Kockesen & Elif Kubilay, 2018. "Starting Small to Communicate," Koç University-TUSIAD Economic Research Forum Working Papers 1805, Koc University-TUSIAD Economic Research Forum.
    11. Maarten Janssen & Sandro Shelegia, 2015. "Consumer Search and Double Marginalization," American Economic Review, American Economic Association, vol. 105(6), pages 1683-1710, June.
    12. Maurus Rischatsch & Maria Trottmann, 2009. "Physician dispensing and the choice between generic and brand-name drugs – Do margins affect choice?," SOI - Working Papers 0911, Socioeconomic Institute - University of Zurich.
    13. Aviv, Yossi & Bazhanov, Andrei & Levin, Yuri & Nediak, Mikhail, 2016. "Quantity Competition under Resale Price Maintenance when Most Favored Customers are Strategic," MPRA Paper 72011, University Library of Munich, Germany.
    14. Bazhanov, Andrei & Levin, Yuri & Nediak, Mikhail, 2015. "Quantity Competition in the Presence of Strategic Consumers," MPRA Paper 62075, University Library of Munich, Germany.
    15. 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.

    More about this item

    Keywords

    Business; Social and Behavioral Sciences;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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