The Effects of Recommended Retail Prices on Consumer and Retailer Behaviour

Abstract

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.