|
Andrea Langer-Ballion

New publication in the Journal of Industrial Economics: „Resale Price Maintenance in a Successive Monopoly Model“

(joint with Christian Wey)

Did you ever wonder why manufacturers often seek to impose minimum retail prices on their retailers? The practice of a manufacturer enforcing retail prices is known as resale price maintenance (RPM), and this can either come in the form of a maximum retail price (max RPM) or a minimum retail price (min RPM), which is the more controversial issue in antitrust regulations. In this paper, we investigate a less-explored explanation for minimum resale price maintenance that is focused on other decision variables the retailer has at hand and that cannot be controlled by the manufacturer. These decision variables can be substitute products the retailer can sell or service levels the retailer can offer for his products. We show that a min RPM is chosen whenever the vertical externality associated with the retailer's additional decision variable is relatively more important for the manufacturer's sales quantity than the double-markup problem that normally occurs in a successive monopoly; a max RPM is chosen if the converse holds. We also establish a direct relation between the occurrence of min and max RPM and the direction of cost-pass through in the absence of RPM. Finally, we show that whether a min RPM benefits or harms consumers depends on the reason why a min RPM is implemented: if the goal is to soften competition with the substitute product, it tends to harm consumers, and if the goal is to secure service provision, it tends to benefit consumers. Altogether, this paper differentiates between different drivers of RPM and derives conditions under which each of them benefits or harms consumers.