Making Sense of Non-Binding Retail-Price Recommendations

42 Pages Posted: 26 Apr 2010  

Stefan Buehler

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

Dennis L. Gärtner

University of Bonn - Faculty of Law & Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2010

Abstract

We model non-binding retail-price recommendations (RPRs) as a communication device facilitating coordination in vertical supply relations. Assuming both repeated vertical trade and asymmetric information about production costs, we show that RPRs may be 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. We also extend our analysis to settings where consumer demand is variable or depends directly on the manufacturer’s RPRs.

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

JEL Classification: D23, D43, L14, L15

Suggested Citation

Buehler, Stefan and Gärtner, Dennis L., Making Sense of Non-Binding Retail-Price Recommendations (April 2010). CESifo Working Paper Series No. 3024. Available at SSRN: https://ssrn.com/abstract=1595926

Stefan Buehler (Contact Author)

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

University of Bonn - Faculty of Law & Economics ( email )

Postfach 2220
D-53012 Bonn
Germany

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