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Inducing Cooperation with a Carrot Instead of a Stick

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  • David E. Mills

    (University of Virginia)

Abstract

The Supreme Court’s reasoning in Leegin turned on the insight that manufacturers may use resale price maintenance (RPM) for procompetitive purposes. This paper presents a model of manufacturer-retailer interactions that clarifies why, as a rule, retailers and manufacturers are joint beneficiaries of service-inducing RPM. The model identifies factors that determine how RPM-generated benefits are allocated between a manufacturer and its retailers. The paper then shows that manufacturers may use market share discounts (MSD) in lieu of RPM or other vertical restraints to induce retailer performance. The outcomes and efficiency effects that are achieved with RPM can be replicated and usually surpassed if manufacturers substitute MSD for RPM, thereby enabling a manufacturer to retain all incremental profit rather than conceding some of it to retailers.

Suggested Citation

  • David E. Mills, 2017. "Inducing Cooperation with a Carrot Instead of a Stick," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 50(2), pages 245-261, March.
    • Handle: RePEc:kap:revind:v:50:y:2017:i:2:d:10.1007_s11151-017-9563-2
    DOI: 10.1007/s11151-017-9563-2
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    References listed on IDEAS

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