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A Model of Recommended Retail Prices

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  • Dmitry Lubensky

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

Abstract

Consumers rely on a manufacturer's recommended price to help determine whether to accept a retailer's price or continue to search. This paper demonstrates that doing so can be rational even if the manufacturer's price recommendation is cheap talk. By incentivizing search, a manufacturer trades off reducing double marginalization and losing consumers to competitors. When the manufacturer's cost is low he induces low retail prices and benefits when consumers search more. When the manufacturer's cost is high he induces high retail prices and benefits when consumers search less. Since consumers prefer to search more when lower prices are available, their incentives are aligned with the manufacturer's and this allows informative cheap talk communication. Aside from costs, the manufacturer can inform consumers of other market parameters such as product quality.

Suggested Citation

  • 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.
  • Handle: RePEc:iuk:wpaper:2013-14
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    File URL: http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bepp2013-14-lubensky.pdf
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    References listed on IDEAS

    as
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      • 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.
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Lisa Bruttel, 2018. "The Effects of Recommended Retail Prices on Consumer and Retailer Behaviour," Economica, London School of Economics and Political Science, vol. 85(339), pages 649-668, July.
    2. Halbheer, Daniel & Bertini, Marco & Buehler, Stefan, 2018. "Consumer Resistance," HEC Research Papers Series 1251, HEC Paris, revised 16 Feb 2018.
    3. In Kyung Kim & Vladyslav Nora, 2017. "Buyer Power and Information Disclosure," Working Papers 1707, Nazarbayev University, Department of Economics, revised Feb 2018.
    4. De los Santos, Babur & Kim, In Kyung & Lubensky, Dmitry, 2018. "Do MSRPs decrease prices?," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 429-457.
      • 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.
    5. Janssen, Maarten & Shelegia, Sandro, 2017. "Beliefs and Consumer Search in a Vertical Industry," MPRA Paper 85134, University Library of Munich, Germany.
    6. Daniel Garcia & Jun Honda & Maarten Janssen, 2017. "The Double Diamond Paradox," American Economic Journal: Microeconomics, American Economic Association, vol. 9(3), pages 63-99, August.
    7. Riemer P. Faber & Maarten C. W. Janssen, 2019. "On the Effects of Suggested Prices in Gasoline Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(2), pages 676-705, April.
    8. Casner, Ben, 2020. "Seller curation in platforms," International Journal of Industrial Organization, Elsevier, vol. 72(C).
    9. Garcia, Daniel & Janssen, Maarten, 2018. "Retail channel management in consumer search markets," International Journal of Industrial Organization, Elsevier, vol. 58(C), pages 162-182.
    10. Janssen, Maarten C.W., 2020. "Vertical contracts in search markets," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    11. 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.
    12. Maarten Janssen & Sandro Shelegia, 2015. "Consumer Search and Double Marginalization," American Economic Review, American Economic Association, vol. 105(6), pages 1683-1710, June.
    13. Janssen, Maarten & Reshidi, Edona, 2018. "Retail Discrimination in Search Markets," CEPR Discussion Papers 12945, C.E.P.R. Discussion Papers.
    14. 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.
    15. Enrique Andreu & Damien Neven & Salvatore Piccolo, 2020. "Delegated Sales, Agency Costs and the Competitive Effects of List Price," CSEF Working Papers 573, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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    More about this item

    Keywords

    consumer search; sequential search; search with uncertainty; manufacturer suggested retail prices; vertical markets; signaling; cheap talk;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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