DP3954 The Manufacturer's Suggested Retail Price

Author(s): Stephanie Rosenkranz
Publication Date: June 2003
Keyword(s): advertising, loss aversion, manufacturer's suggested retail price, reference dependence, vertical product differentiation
JEL(s): D10, D40, L10, L20, M37
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3954

Based on arguments of the ?reference-dependent? theory of consumer choice we assume that a retailer?s discount of a manufacturer?s suggested retail price changes consumers? demand. We can show that the producer benefits from suggesting a retail price. If consumers are additionally sufficiently ?loss averse?, e.g. consumers? disappointment from higher than suggested retail prices is sufficiently high, the producer can force the retailer to take the suggested price in equilibrium and thus capture some of the retailer?s profits. A producer always benefits from investing into an advertising campaign with suggested retail prices.