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Making Sense of Non-Binding Retail-Price Recommendations

  • Stefan Bühler

    ()

  • Dennis L. Gärtner

    ()

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 surplusmaximizing 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.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/dp2009/DP-0902-Bu.pdf
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Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2009 with number 2009-02.

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Length: 30 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:usg:dp2009:2009-02
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