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Do MSRPs Decrease Prices?

  • Babur De los Santos

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

  • In Kyung Kim

    (Department of Economics, Indiana University)

  • Dmitry Lubensky

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

The nature of manufacturer’s suggested retail prices (MSRP) and whether their effect is pro or anticompetitive is not well understood. Opposing theories suggest that manufacturers may attempt to reduce retail prices to deter double marginalization or increase retail prices to foster upstream or downstream collusion. We exploit a policy experiment in South Korea in which MSRPs were banned and then reinstated one year later to estimate their impact on prices. The ban increased prices by 2.3 percent and the reinstatement decreased prices by 2.6 percent, demonstrating the pro-competitive effect of MSRPs. Based on a lack of evidence that recommendations act as binding price ceilings, we offer an alternative explanation in which MSRPs provide information to searching consumers. We demonstrate that the removal of recommendations can reduce search and increase prices.

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File URL: http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bepp2013-13-delossantos-kim-lubensky.pdf
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Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2013-13.

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Date of creation: Dec 2013
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Handle: RePEc:iuk:wpaper:2013-13
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  1. 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.
  2. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  3. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
  4. Clemens Puppe & Stephanie Rosenkranz, 2011. "Why Suggest Non‐Binding Retail Prices?," Economica, London School of Economics and Political Science, vol. 78(310), pages 317-329, 04.
  5. Rothschild, Michael, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 689-711, July/Aug..
  6. Klein, Benjamin & Murphy, Kevin M, 1988. "Vertical Restraints as Contract Enforcement Mechanisms," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 265-97, October.
  7. Moraga-Gonzalez, Jose L. & Sandor, Zsolt & Wildenbees, Matthijs R., 2010. "Nonsequential search equilibrium with search cost heterogeneity," IESE Research Papers D/869, IESE Business School.
  8. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
  9. 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.
  10. Michael Rothschild, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown: A Summary," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 1, pages 293-294 National Bureau of Economic Research, Inc.
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