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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- Milgrom, Paul & Shannon, Chris, 1994.
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- Rosenkranz, Stephanie, 2003. "The Manufacturer's Suggested Retail Price," CEPR Discussion Papers 3954, C.E.P.R. Discussion Papers.
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- 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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