Making Sense of Non-Binding Retail-Price Recommendations
32 Pages Posted: 2 Mar 2009 Last revised: 19 Oct 2011
Date Written: October 16, 2011
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: Suggested Citation