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| Author: | Puppe, C. Rosenkranz, S. |
| Title: | Why suggest non-binding retail prices? |
| Journal: | Economica
2011 : APR, VOL. 78:310 p. 317-329 |
| Index terms: | behavioural science manufacturing products models retailing prices profit microeconomics models |
| Language: | eng |
| Abstract: | This paper offers a simple behavioral explanation of why manufacturers frequently announce non-binding suggested retail prices for their products. It proposes a model which is based on the assumption that once the actual price for a product exceeds its suggested retail price, the marginal propensity to consume suddenly jumps downward. This property of individual demand corresponds to Kahneman and Tversky's concept of loss aversion. It is illustrated that it may induce a monopolistic retailer to set the price equal to the suggested retail price in equilibrium, although the latter price is nonbinding. This, in turn, leads to a shift of profits from the retailer to the manufacturer. |
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