Applying international reference price ‐ Market structure, information seeking and consumer welfare

Examines the conditions and different structural settings in which a retailer is likely to apply an international reference price strategy to an imported product. We define the term “international reference price” as an external reference price that reflects the product’s price in different countries. It can be set by providing true but incomplete information rather than by outright manipulation of the reference price, which may involve providing consumers with false information. This study offers a model that describes both the consumer’s utility calculations regarding price information seeking and the retailer’s utility calculations regarding the application of international reference price. It is shown that instability of economic markets combined with access to information technology motivate consumers to seek information about prices. It is also shown that in unstable markets retailers have incentive to provide true but incomplete information about the product’s price in another market. In this setting, the retailer’s use of an international reference price might actually damage consumer welfare. This potential damage may be reduced by international cooperation to establish economic agreements.