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Suggested retail prices with downstream competition

Author

Listed:
  • Simona Fabrizi

    (School of Economics and Finance, Massey University, New Zealand)

  • Steffen Lippert

    (Department of Economics, University of Otago, New Zealand)

  • Clemens Puppe

    (Department of Economics, Karlsruhe Institute of Technology, Germany)

  • Stephanie Rosenkranz

    (Utrecht School of Economics, The Netherlands)

Abstract

We analyze vertical relationships between a manufacturer and competing retailers when consumers have reference-dependent preferences. Consumers adopt the manufacturer's suggested retail price as their reference price and perceive losses when purchasing above the suggested price and gains when purchasing below it. In equilibrium, retailers undercut price suggestions and the manufacturer suggests a retail price if consumers are sufficiently bargain-loving and perceive retailers as sufficiently undifferentiated. The manufacturer engages in resale price maintenance otherwise. Consumers can be worse off with suggested retail prices than with resale price maintenance, prompting a rethinking of the current legal treatment of suggested retail prices.

Suggested Citation

  • Simona Fabrizi & Steffen Lippert & Clemens Puppe & Stephanie Rosenkranz, 2010. "Suggested retail prices with downstream competition," Working Papers 1203, University of Otago, Department of Economics, revised Aug 2012.
    • Handle: RePEc:otg:wpaper:1203
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    File URL: http://www.otago.ac.nz/economics/research/otago076654pdf.pdf
    File Function: Revised version, 2012
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    References listed on IDEAS

    as
    1. Richard H. Thaler & Amos Tversky & Daniel Kahneman & Alan Schwartz, 1997. "The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 647-661.
    2. Jidong Zhou, 2011. "Reference Dependence and Market Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(4), pages 1073-1097, December.
    3. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    4. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
    5. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261.
    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. Stefan Buehler & Dennis L. Gärtner, 2013. "Making Sense of Nonbinding Retail-Price Recommendations," American Economic Review, American Economic Association, vol. 103(1), pages 335-359, February.
    3. 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.

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    More about this item

    Keywords

    suggested or recommended retail prices; resale price maintenance; reference-dependent preferences; vertical restraints; competition law and policy;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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