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Making Sense of Non-Binding Retail-Price Recommendations

Stefan Bühler & Dennis Gärtner

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abstract We model retail-price recommendations (RPRs) as a communication device in vertical supply relations with private manufacturer information on production costs and consumer demand. With static trade, RPRs are irrelevant, and the equilibrium outcome is inefficient. With repeated trade, RPRs can become part of a relational contract, communicating private information from manufacturer to retailer that is indispensable for maximizing joint surplus. We show that this contract is self-enforcing if the retailer’s profit is independent of production costs and punishment strategies are chosen appropriately. The predictions of our analysis are consistent with the available empirical evidence.
   
type journal paper
   
keywords Vertical relationships, relational contracts, asymmetric information,
price recommendations
   
language English
kind of paper journal article
date of appearance 2-2013
journal American Economic Review
publisher American Economic Association (Nashville)
ISSN 0002-8282
ISSN (online) 1944-7981
DOI 10.1257/aer.103.1.335
volume of journal 103
number of issue 1
page(s) 335-359
review double-blind review
   
citation Bühler, S., & Gärtner, D. (2013). Making Sense of Non-Binding Retail-Price Recommendations. American Economic Review, 103(1), 335-359, DOI:10.1257/aer.103.1.335.