Why Suggest Non-Binding Retail Prices?
We provide a simple behavioral explanation of why manufacturers frequently announce non-binding suggested retail prices for their products. Our model is based on the assumption that once the actual price for a product exceeds its suggested retail price, the marginal propensity to consume suddenly jumps downward. This property of individual demand corresponds to Kahneman and Tverskyâ€™s concept of loss aversion. We show that it may induce a monopolistic retailer to set the price equal to the suggested retail price in equilibrium, although the latter price is nonbinding. This, in turn, leads to a shift of profits from the retailer to the manufacturer.
|Date of creation:||2006|
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- S. Rosenkranz, 2003. "Manufacturer's Suggested Retail Prices," Working Papers 03-05, Utrecht School of Economics.
- Amos Tversky & Daniel Kahneman, 1979.
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IDEI Working Papers
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- 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.
- Rosenkranz, Stephanie, 2003. "The Manufacturer's Suggested Retail Price," CEPR Discussion Papers 3954, C.E.P.R. Discussion Papers.
- Frank Mathewson & Ralph Winter, 1998. "The Law and Economics of Resale Price Maintenance," Review of Industrial Organization, Springer, vol. 13(1), pages 57-84, April.
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