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The Effects of Non-binding Retail-price Recommendations on Consumer and Retailer Behavior

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  • Lisa Bruttel

Abstract

This paper presents results from an experiment on the effects of retail-price recommendations (RPRs) on consumer and retailer behavior. Despite their non-binding nature, RPRs may influence consumers’ willingness to pay by setting a reference point. Loss averse consumers will then be reluctant to pay a price higher than the recommended one. Furthermore, at a given price level consumers will demand a larger quantity the higher the RPR is. We find evidence for both effects. They are stronger when the price recommendation contains information about the value of the product to the consumer instead of providing an uncorrelated anchor only. Retailers in this study react to RPRs in a similar way as consumers do, but they do not anticipate consumers’ behavior well.

Suggested Citation

  • 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.
  • Handle: RePEc:twi:respas:0093
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    File URL: https://www.twi-kreuzlingen.ch/wp-content/uploads/2017/12/twi-rps-093-bruttel.pdf
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    References listed on IDEAS

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    1. repec:bla:randje:v:48:y:2017:i:2:p:358-386 is not listed on IDEAS
    2. Dmitry Lubensky, 2017. "A model of recommended retail prices," RAND Journal of Economics, RAND Corporation, vol. 48(2), pages 358-386, May.
    3. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-1268, September.
    4. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1133-1165.
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    6. 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.
    7. 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, April.
    8. 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.
    9. Armin Falk & Ernst Fehr & Urs Fischbacher, 2003. "On the Nature of Fair Behavior," Economic Inquiry, Western Economic Association International, vol. 41(1), pages 20-26, January.
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    Cited by:

    1. 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

    recommended retail price; consumer behavior; retailer behavior; experiment;

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