The term MSRP is an abbreviation for manufacturer's suggested retail price. This is simply the price that the manufacturer suggests the dealer asks for the car. You'll see it on the Monroney (window sticker) while perusing any dealership shopping for cars — it's the law to have it there.
However, the dealership doesn't have to charge that price at all. Most of the time buyers will drive away having paid less than the MSRP lists. In rare situations, a dealership will actually mark the price up when there is heavy demand for a particular car. This typically happens with performance cars — the Honda Civic Type R, Dodge Challenger Demon and Ford Mustang Shelby GT350R all fell prey to dealers doing this sort of thing. Sometimes this works for them, but in other cases people just end up not buying the car if it's extremely overpriced.
How is the price determined?
This price is determined by a manufacturer by adding up the base price, destination charges and options on the car. The base price is typically what the car costs without any of the aforementioned charges included. Put everything together, and you'll be looking at the MSRP.
What effect does it have on what I ultimately pay?
The MSRP, also known as the sticker price, is most likely the biggest factor in what you end up walking out the door paying. Of course, you can negotiate a cheaper price if the dealer is willing to negotiate. Dealerships will always try to get you to pay that full MSRP, but more times than not, a deal is struck below said value.
All seems pretty straightforward, right?
That's right. The manufacturer's suggested retail price is one of the easier concepts to grasp when it comes to navigating the process of buying a new car. It's a super easy way to compare vehicles in the same segment based on what a manufacturer thinks the car is worth. Most manufacturers' websites will list the MSRP, so figuring out what a car costs is simple online. Sometimes you'll see manufacturers use MSRP for describing a car's price without any options or destination charges.
Pay attention to promotions and sales that manufacturers run every now and then though. If you bide your time and wait for the car you want to have some cash on the hood, there's a great chance of you driving away a new car for far below the listed MSRP.