Working Paper: CEPR ID: DP3954
Authors: Stephanie Rosenkranz
Abstract: Based on arguments of the ?reference-dependent? theory of consumer choice we assume that a retailer?s discount of a manufacturer?s suggested retail price changes consumers? demand. We can show that the producer benefits from suggesting a retail price. If consumers are additionally sufficiently ?loss averse?, e.g. consumers? disappointment from higher than suggested retail prices is sufficiently high, the producer can force the retailer to take the suggested price in equilibrium and thus capture some of the retailer?s profits. A producer always benefits from investing into an advertising campaign with suggested retail prices.
Keywords: advertising; loss aversion; manufacturers suggested retail price; reference dependence; vertical product differentiation
JEL Codes: D10; D40; L10; L20; M37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| MSRP (D49) | willingness to pay (D11) |
| willingness to pay (D11) | demand (R22) |
| retail price (pr) < MSRP (ps) (L42) | willingness to pay (D11) |
| retail price (pr) > MSRP (ps) (D49) | willingness to pay (D11) |
| MSRP as reference point (L11) | consumer behavior (D19) |
| loss aversion (G41) | willingness to pay (D11) |
| MSRP (D49) | retailer’s profits (L81) |
| MSRP (D49) | manufacturer profits (D49) |