The Eﬀects of Recommended Retail Prices on Consumer
and Retailer Behaviour
University of Potsdam
Final version received 12 September 2016.
This paper presents results from an experiment on the eﬀects of recommended retail prices on consumer
and retailer behaviour. We present evidence that recommended retail prices, despite their non-binding
nature, inﬂuence consumers’ willingness to pay by setting a reference point. At a given price, consumers
buy more the higher the recommended retail price is, and their demand drops at prices above the
recommended retail price, even when it is entirely uninformative about the value of the product. Retailers
in this study are subject to similar anchoring eﬀects, but they do not anticipate consumers’ behaviour well
and are thus not able to exploit their behavioural biases.
Recommended retail prices are prominent in pricing. They can be found on small goods
like chocolate bars or big ones like cars. Manufacturers use this measure to suggest to
their retailer(s) a price at which the product should be sold to consumers. Although such
recommended prices are non-binding by deﬁnition,
there are ways in which their use can
be rationalized. For example, Buehler and Gaertner (2013) show that recommended
retail prices can transmit information about production costs and consumer demand
from the manufacturer to the retailer, and thus serve as a coordination device in a
repeated interaction between the two. Similarly, in the model of Lubensky (2010),
information transmission goes directly from the manufacturer to consumers where it can
help in reducing search costs. In the experiment in the present study, we test whether such
recommended retail prices inﬂuence the behaviour of buyers and retailers under
controlled laboratory conditions removing such rational channels.
A purely behavioural impact of recommended retail prices on consumer demand may
arise because they set an anchor (see, for example, Ariely et al. 2003; Stewart 2009;
Tversky and Kahneman 1974) for an appropriate price of the product.
retail prices are then predicted to aﬀect consumers’ willingness to pay via reference points
and loss aversion (Rosenkranz 2003; Fabrizi et al. 2012). If the recommended price
forms a reference point, then loss-averse consumers are unlikely to pay a price higher
than the recommendation.
This allows for ‘moon pricing’, the combination of an
artiﬁcially high recommended price and a much lower actual price in order to increase
demand (Armstrong and Chen 2012).
Retailers may adapt their price setting to the
discontinuities in the demand schedule, but may also be subject to their own anchoring
biases resulting from receiving the price recommendation.
This paper studies the behavioural eﬀects of recommended retail prices on buyer and
retailer behaviour. Using experimental data, it attempts to help to answer the following
research questions. What is the eﬀect of a price recommendation on consumers’
willingness to pay? How does the retailers’ price setting behaviour depend on whether
consumers are informed about the recommended price? How do demand and price
setting depend on whether the recommended price contains an informative signal about
the quality of the product?
© 2016 The London School of Economics and Political Science. Published by Blackwell Publishing, 9600 Garsington Road,
Oxford OX4 2DQ, UK and 350 Main St, Malden, MA 02148, USA
Economica (2018) 85, 649–668