Resale Price Maintenance and Restrictions on Dominant Firm and Industry-Wide Adoption

Posted by D. Daniel Sokol

Oystein Foros (Norwegian School of Economics and Business Administration), Hans Jarle Kind (Norwegian School of Economics and Business Administration) and Greg Shaffer (University of Rochster) address Resale Price Maintenance and Restrictions on Dominant Firm and Industry-Wide Adoption.

ABSTRACT: We consider a model in which firms use resale price maintenance (RPM) to dampen competition. We find that even though the motive for using RPM is thus anticompetitive, market forces may limit the overall adverse impact on consumers. Indeed, we find that when there are a large number of firms in the market, consumer welfare under a laissez-faire policy might be as high or almost as high as it would be under an alternative policy in which RPM is banned. Government interventions that put an upper limit on the extent of industry-wide adoption of RPM can have adverse welfare effects in the model. We further show that proposed guidelines in the United States and Europe may come close to minimizing welfare.