The Adoption of Suggested Retail Prices

The suggested retail price (SRP) is widely applied in various industries and product categories in practice, and it can serve as a reference price, which impacts a consumer's utility through reference effect. In this paper, we study a firm's decisions of whether and how the firm should set an SRP, and how to decide the corresponding price, under three scenarios: monopoly, duopoly and two-echelon supply chain. Consumers in our model are loss-averse and have heterogeneous preferences. We find that the monopolist and the upstream manufacturer in supply chain should always adopt an SRP. When competition is fierce, both duopolists should also adopt SRPs, although they are caught in a prisoner's dilemma. Mild competition, however, prevents both duopolists from adopting SRPs. In the supply chain scenario, we show that weak loss aversion leads the manufacturer to set the highest SRP, while strong loss aversion motivates the manufacturer to set an SRP that induces an equal retail price from the retailer, which conforms to observations in practice. We further show that adopting an SRP, although increases the total supply chain's profit, does not necessarily benefit the retailer or the supply chain efficiency. A win-win situation between the manufacturer and the retailer takes place only when consumers are slightly loss-averse and highly diverse in preference