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American Economic Review: Vol. 103 No. 1 (February 2013)

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Making Sense of Nonbinding Retail-Price Recommendations

Article Citation

Buehler, Stefan, and Dennis L. Gäertner. 2013. "Making Sense of Nonbinding Retail-Price Recommendations." American Economic Review, 103(1): 335-59.

DOI: 10.1257/aer.103.1.335

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)

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Authors

Buehler, Stefan (Institute of Economics, U St Gallen)
Gäertner, Dennis L. (U Bonn)

JEL Classifications

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


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