Resale Price Maintenance: Hurting Competitors, Consumers and Yourself
AbstractImproving retailers’ incentives for service is a prominent efficiency defense for resale price maintenance (RPM). We investigate the incentives of symmetric manufacturers to use RPM when selling products through common retailers who provide services such as pre-sale advice. We show that the possibility to use minimum RPM can create a dilemma for manufacturers when retailers influence consumer choice through service. If price competition among retailers is strong, a manufacturer benefits from introducing minimum RPM as it incentivizes retailers to favor the sales of her product. However, other manufacturers follow into RPM. In the symmetric equilibrium, service is unbiased, but retail margins and consumer prices are higher than without RPM. In turn, manufacturers’ profits and social welfare are lower. This challenges the service argument as an efficiency defense for RPM.
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Bibliographic InfoPaper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 100.
Length: 38 pages
Date of creation: May 2011
Date of revision:
biased sales advice; common agency; manufacturer dilemma; matching; RPM; vertical restraints;
Find related papers by JEL classification:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
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