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Making Sense of Nonbinding Retail-Price Recommendations

Type of publication Peer-reviewed
Publikationsform Original article (peer-reviewed)
Publication date 2013
Author Buehler Stefan, Dennis Gärtner,
Project Industrial Organization, Regulation, and the Foundations of Competition Policy
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Original article (peer-reviewed)

Journal American Economic Review
Volume (Issue) 103(1)
Page(s) 335 - 359
Title of proceedings American Economic Review
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.
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