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Quantity Competition under Resale Price Maintenance when Most Favored Customers are Strategic

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  • Aviv, Yossi
  • Bazhanov, Andrei
  • Levin, Yuri
  • Nediak, Mikhail

Abstract

Legal studies usually treat a policy of a manufacturer or retailer as socially harmful if it reduces product output and increases the price. We consider a two-period model where the first-period price is fixed by resale price maintenance (RPM) and resellers endogenously decide to use another "collusion suspect," meet-the-competition clause with a most-favored-customer clause (MFC), to counteract strategic customer behavior. As a result of MFC, second-period (reduced) price increases, and resellers' inventories decrease. However, customer surplus may increase and aggregate welfare increases in the majority of market situations. MFC can not only decrease the losses in welfare and resellers' profits due to strategic customers but, under reseller competition, may even lead to higher levels of these values than with myopic customers, i.e., to gains from increased strategic behavior. MFC may create "MFC-traps" for resellers, where one of possible market outcomes yields a gain from increased strategic behavior while another results in a reseller profit less than the worst profit in any stable outcome without MFC. With growing competition, benefits or losses from MFC can be higher than losses from strategic customer behavior.

Suggested Citation

  • Aviv, Yossi & Bazhanov, Andrei & Levin, Yuri & Nediak, Mikhail, 2016. "Quantity Competition under Resale Price Maintenance when Most Favored Customers are Strategic," MPRA Paper 72011, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:72011
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    References listed on IDEAS

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    Cited by:

    1. Andrei Bazhanov & Yuri Levin & Mikhail Nediak, 2019. "Resale Price Maintenance with Strategic Customers," Production and Operations Management, Production and Operations Management Society, vol. 28(3), pages 535-549, March.
    2. Alexander MacKay & David A. Smith, 2017. "Challenges for Empirical Research on RPM," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 50(2), pages 209-220, March.

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    More about this item

    Keywords

    most favored customer; strategic customer behavior; quantity competition; limited-lifetime product;
    All these keywords.

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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