Retail Price Parity as a Channel-Coordination Mechanism in Dual Distribution

When a manufacturer distributes its products through both a direct sales channel and an independent retailer, a fundamental tension arises between the efficiencies of direct distribution and the need to incentivize the retailer. To induce the retailer to undertake noncontractible actions that enhance demand, such as pre- and post-sale assistance, the manufacturer must grant it a high gross margin. This, however, creates incentives for the manufacturer to undercut the retailer ex post through its direct channel. We show that a retail price parity (RPP) policy, which requires identical retail prices across the direct and independent channels, can increase industry profits. By allowing the manufacturer to commit not to undercut the retailer, RPP strengthens the retailer's incentives to undertake valuable noncontractible actions and enables supply contracts that increase joint profits. Because higher effort improves service quality, RPP may also increase consumer welfare even when it leads to higher monetary retail prices. These findings offer guidance for managers designing dual distribution strategies and inform policy discussions on the competitive effects of price-parity clauses.