Why Suggest Non‐Binding Retail Prices?

We provide a simple behavioural explanation of why manufacturers frequently announce non‐binding suggested retail prices for their products. Our model is based on the assumption that once the actual price for a product exceeds its suggested retail price, the marginal propensity to consume suddenly jumps downward. We show that this may induce a monopolistic retailer to set the price equal to the suggested retail price in equilibrium, although the latter price is non‐binding. This, in turn, leads to a shift of profits from the retailer to the manufacturer.