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A Model of Recommended Retail Prices

Dmitry Lubensky ()

No 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)
JEL-codes: D82 L11 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-com, nep-cta, nep-ind and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bepp2013-14-lubensky.pdf (application/pdf)

Related works:
Journal Article: A model of recommended retail prices (2017) Downloads
Working Paper: A Model of Recommended Retail Prices (2011) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:iuk:wpaper:2013-14

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