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Making Sense of Non-Binding Retail-Price Recommendations

Author

Listed:
  • Stefan Buehler

    (University of St.Gallen)

  • Dennis L. Gaertner

    (Socioeconomic Institute, University of Zurich)

Abstract

This paper provides a theoretical rationale for non-binding retail price recommendations (RPRs) in vertical supply relations. Analyzing a bilateral manufacturer-retailer relationship with repeated trade, we show that linear relational contracts can implement the surplus-maximizing outcome. If the manufacturer has private information about production costs or consumer demand, RPRs may serve as a communication device from manufacturer to retailer. We characterize the properties of efficient bilateral relational contracts with RPRs and discuss extensions to settings where consumer demand is affected by RPRs, and where there are multiple retailers or competing supply chains.

Suggested Citation

  • Stefan Buehler & Dennis L. Gaertner, 2009. "Making Sense of Non-Binding Retail-Price Recommendations," SOI - Working Papers 0902, Socioeconomic Institute - University of Zurich.
  • Handle: RePEc:soz:wpaper:0902
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    More about this item

    Keywords

    vertical relationships; relational contracts; asymmetric information; price recommendations;
    All these keywords.

    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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