Wednesday, May 26, 2010

Making Sense of Non-Binding Retail-Price Recommendations

Posted by D. Daniel Sokol

Stefan Buehler, University of St. Gallen - Department of Economics and Dennis Gärtner, University of Zurich - Socioeconomic Institute help us in 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 retailer’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 manufacturer’s RPRs.

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