42 Pages Posted: 26 Apr 2010
Date Written: April 2010
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: 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