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Manufacturer's Suggested Retail Prices

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  • S. Rosenkranz

Abstract

Based on arguments of the `reference- dependent' theory of consumer choice we assume that a retailer's discount of a manufacturer's suggested retail price changes consumers' demand. We can show that the producer benefits from suggesting a retail price. If consumers are additionally sufficiently `loss averse', e.g. consumers' disappointment from higher than suggested retail prices is sufficiently high, the producer can force the retailer to take the suggested price in equilibrium and thus capture some of the retailer's profits. A producer always benefits from investing into an advertising campaign with suggested retail prices.Keywords: manufacturer's suggested retail price, vertical product differentiation, advertising, reference dependence, loss aversion

Suggested Citation

  • S. Rosenkranz, 2003. "Manufacturer's Suggested Retail Prices," Working Papers 03-05, Utrecht School of Economics.
  • Handle: RePEc:use:tkiwps:0305
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    File URL: https://dspace.library.uu.nl/bitstream/handle/1874/309118/03_05.pdf
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    References listed on IDEAS

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    1. Monika Schnitzer, 1994. "Dynamic Duopoly with Best-Price Clauses," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 186-196, Spring.
    2. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
    3. B. Douglas Bernheim & Michael D. Whinston, 1985. "Common Marketing Agency as a Device for Facilitating Collusion," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 269-281, Summer.
    4. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
    5. Horowitz, Joel L, 1992. "The Role of the List Price in Housing Markets: Theory and an Econometric Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(2), pages 115-129, April-Jun.
    6. Ram C. Rao & Niladri Syam, 2001. "Equilibrium Price Communication and Unadvertised Specials by Competing Supermarkets," Marketing Science, INFORMS, pages 61-81.
    7. Charles A. Holt & David T. Scheffman, 1987. "Facilitating Practices: The Effects of Advance Notice and Best-Price Policies," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 187-197, Summer.
    8. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    9. Frank Mathewson & Ralph Winter, 1998. "The Law and Economics of Resale Price Maintenance," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 13(1), pages 57-84, April.
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    Citations

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    Cited by:

    1. Ahrens, Steffen & Pirschel, Inske & Snower, Dennis J., 2017. "A theory of price adjustment under loss aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 78-95.
    2. Sibly, Hugh, 2007. "Loss aversion, price and quality," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(5), pages 771-788, October.
    3. 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.

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