Resale price maintenance and manufacturer competition for retail services

Abstract

We investigate the incentives of two manufacturers with common retailers to use resale price maintenance (RPM). Retailers provide product‐specific services that increase demand and manufacturers use minimum RPM to compete for favorable retail services for their products. Minimum RPM increases consumer prices and can create a prisoner's dilemma for manufacturers without increasing, and possibly even reducing, the overall level of retail services. If manufacturer market power is asymmetric, minimum RPM may distort the allocation of services toward the high‐priced products of the manufacturer with more market power. These results challenge the service argument as an efficiency defense for minimum RPM.

Platform most-favored-customer clauses and investment incentives

“…Therefore, our results differ from those derived in studies of RPM agreements (e.g., Gabrielsen and Johansen, 2017;Hunold and Muthers, 2017). They show that the introduction of RPM agreements raises equilibrium retail prices when both competition between upstream firms and competition between downstream firms are sufficiently intense.…”

Resale Price Maintenance in a Successive Monopoly Model*

“…Min RPM can also eliminate all effective competition-at the interbrand level as well as at the intrabrand level-through networks of interlocking RPM agreements in a setting with two manufacturers and common retailers (Dobson and Waterson [2007]; Rey and Vergé [2010]). In this setup, Hunold and Muthers [2017] also challenge the service argument as an efficiency defense for a min RPM by showing that if manufacturer market power is asymmetric, a min RPM may distort the allocation of services toward the high-priced products of the manufacturer with more market power. 5 Our explanation for a min RPM can be empirically distinguished from all the preceding explanations as it (i) does not rely on either competition on the side of the retailers or on retailer service free riding, so prevails absent intrabrand competition, and (ii) does not rely on manufacturers using it as some coordination device by implementing it mutually.…”

On the Profitability of Resale Price Maintenance When Demand Is Uncertain

“…Rey and Verge () show that RPM indeed limits the exercise of competition at both manufacturer and retailer levels and can generate industry‐wide monopoly pricing, when manufacturers distribute their goods through the same competing distributors. Hunold and Muthers () challenge the idea that minimum RPM is efficient in encouraging retail services. They find that when manufacturers use minimum RPM to compete for favourable retail services, the consumer prices would be higher and the overall level of retail services could be lower.…”