Skip to main content
Article thumbnail
Location of Repository

Why Suggest Non-Binding Retail Prices?

By C. Puppe and S. Rosenkranz

Abstract

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 Tversky’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

Topics: manufacturer's suggested retail price, reference dependence, loss aversion
Year: 2006
OAI identifier: oai:dspace.library.uu.nl:1874/37230
Download PDF:
Sorry, we are unable to provide the full text but you may find it at the following location(s):
  • http://dspace.library.uu.nl:80... (external link)
  • Suggested articles


    To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.