Friday, September 24, 2010
Posted by D. Daniel Sokol
Dennis Gartner (St. Galen - Econ) and Stefan Buehler (Zurich - Econ) are for Making Sense of Non-Binding Retail-Price Recommendations.
ABSTRACT: We model non-binding retail-price recommendations (RPRs) as a communication device facilitating coordination in vertical supply relations. Assuming both repeated vertical trade and asymmetric information about production costs, we show that RPRs may be 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 retailerâ€™s profit is independent of production costs and punishment strategies are chosen appropriately. We also extend our analysis to settings where consumer demand is variable or depends directly on the manufacturerâ€™s RPRs. Keywords: vertical relationships, relational contracts, asymmetric information, price recommendations.