 A Model of Recommended Retail PricesNo 2013-14, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy Abstract: Consumers rely on a manufacturer's recommended price to help determine whether to accept a retailer's price or continue to search. This paper demonstrates that doing so can be rational even if the manufacturer's price recommendation is cheap talk. By incentivizing search, a manufacturer trades off reducing double marginalization and losing consumers to competitors. When the manufacturer's cost is low he induces low retail prices and benefits when consumers search more. When the manufacturer's cost is high he induces high retail prices and benefits when consumers search less. Since consumers prefer to search more when lower prices are available, their incentives are aligned with the manufacturer's and this allows informative cheap talk communication. Aside from costs, the manufacturer can inform consumers of other market parameters such as product quality. Keywords: consumer search; sequential search; search with uncertainty; manufacturer suggested retail prices; vertical markets; signaling; cheap talk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:iuk:wpaper:2013-14 Access Statistics for this paper More papers in Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy Contact information at EDIRC. |
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