Making Sense of Non-Binding Retail-Price Recommendations

32 Pages Posted: 2 Mar 2009 Last revised: 19 Oct 2011

See all articles by Stefan Buehler

Stefan Buehler

University of St. Gallen - SEPS: Economics and Political Sciences

Dennis L. Gärtner

University of St. Gallen

Multiple version iconThere are 2 versions of this paper

Date Written: October 16, 2011

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.

Keywords: vertical relationships, relational contracts, asymmetric information, price recommendations

JEL Classification: D23, D42, L14, L15

Suggested Citation

Buehler, Stefan and Gärtner, Dennis L., Making Sense of Non-Binding Retail-Price Recommendations (October 16, 2011). Available at SSRN: https://ssrn.com/abstract=1351138 or http://dx.doi.org/10.2139/ssrn.1351138

Stefan Buehler

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

FGN-HSG
Varnbuelstr. 19
CH-9000 St. Gallen
Switzerland
+41-71-224-2303 (Phone)

Dennis L. Gärtner (Contact Author)

University of St. Gallen ( email )

Bodanstrasse 6
St Gallen, 9000
Switzerland

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