Monday, January 13, 2014

Do MRSPs (manufacturer suggested retail prices) have an impact on prices?

In some countries, manufacturers are allowed to suggest to retailers how to price their goods. What does this do to prices? It may increase them if it reduces competition and the MRSP is set high. It could also increase competition if set low, as retailers may find it difficult to sell at a higher price than printed on the packaging.

Babur de los Santos, In Kyung Kim and Dmitry Lubensky report on a natural experiment in South Korea where MRSPs were banned and then allowed within a one-year span. The ban increased prices on average by 2.3%, the reintroduction reduced them by 2.6%, from which you can conclude that MRSPs increase competition. Prices were significantly below MRSPs, so it is not likely MRSPs acted as price ceilings. Rather, the authors conjecture that MRSPs help consumers in forming expectations of prices at other retailers once they see the mark-down at the current retailer. Absent the MRSP, the consumer faces higher search costs, and the retailers takes advantage by increasing the price. To be convinced of this argument, I would have liked to see some estimates by product category. Different mark-downs must have had different implications for price changes, and those should help us distinguish theories better than aggregate results.

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