American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Making Sense of Nonbinding Retail-Price Recommendations
American Economic Review
vol. 103,
no. 1, February 2013
(pp. 335–59)
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. (JEL D21, D24, L11, L14, L22, L60, L81)Citation
Buehler, Stefan, and Dennis L. Gärtner. 2013. "Making Sense of Nonbinding Retail-Price Recommendations." American Economic Review, 103 (1): 335–59. DOI: 10.1257/aer.103.1.335JEL Classification
- D21 Firm Behavior: Theory
- D24 Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- L11 Production, Pricing, and Market Structure; Size Distribution of Firms
- L14 Transactional Relationships; Contracts and Reputation; Networks
- L22 Firm Organization and Market Structure
- L60 Industry Studies: Manufacturing: General
- L81 Retail and Wholesale Trade; e-Commerce