Speaker:     Simona Fabrizi
Affiliation: Massey University (Albany)
Title:       Suggested retail prices with downstream competition
Date:        Tuesday, 24 May 2011
Time:        4:00 pm
Location:    Room 6115, Owen Glenn Building

We analyze a manufacturer’s choice whether to recommend retail prices (RRP) to horizontally differentiated downstream competing retailers or to use more traditional vertical price restraints, such as resale price maintenance (RPM), when consumers have reference-dependent preferences. If recommended prices are taken as a reference point, consumers can suffer from loss aversion when facing retail prices above this reference point, but also benefit from gain proneness when prices are set below this level. In equilibrium, retailers do not set prices above their recommended levels; manufacturers prefer RPM over RRP when retailers follow the recommendation strictly; but manufacturers prefer RRP over RPM when the recommendation is undercut by retailers (discounting occurs). Two types of conflicts with respect to consumers’ surplus potentially arise when manufacturers can choose between RRP and RPM. There are combinations of gain proneness and degrees of competition for which either (i) manufacturers choose traditional resale price maintenance (RPM) even though recommending prices would have been consumers’ surplus enhancing; or, vice versa (ii) manufacturers choose to recommend retail prices (RRP) despite it would have been consumers’ surplus enhancing not to do so.

This paper is written Jointly with Steffen Lippert (Massey University), Clemens Puppe (Karlsruhe University of Technology) and Stephanie Rosenkranz (Utrecht University)