Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/240436 
Year of Publication: 
2021
Series/Report no.: 
Working Papers in Economics and Statistics No. 2021-08
Publisher: 
University of Innsbruck, Research Platform Empirical and Experimental Economics (eeecon), Innsbruck
Abstract: 
This paper studies the competitive role of list prices. We argue that such prices are often more salient than actual retail prices, so consumers' purchase decisions may be influenced by them. Two firms compete by setting prices in a homogeneous product market. They first set a list price that serves as an upper bound on their retail price. Then, after having observed each other's list price, they set retail prices. Building on the canonical Varian (1980) model, we assume that some consumers observe no prices, some observe all prices, and some only observe list prices. We show that if the latter partially informed consumers use a simple rule of thumb, the use of list prices leads to lower retail prices on average. This effect is weakened if partially informed consumers are rational.
Subjects: 
list prices
recommended retail prices
price competition
price dispersion
advertising
JEL: 
C72
L13
Document Type: 
Working Paper

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