Manufacturer's Suggested Retail Prices

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: manufacturer's suggested retail price, vertical product differentiation, advertising, reference dependence, loss aversion