Thursday, December 30, 2010
Posted by D. Daniel Sokol
John Asker (NYU - Stern School of Business) and Heski Bar-Isaacz (NYU - Stern School of Business) discuss Exclusionary Minimum Resale Price Maintenance.
ABSTRACT:An upstream manufacturer can use minimum retail price maintenance
(RPM) to exclude potential competitors. RPM lets the incumbent manufacturer transfer profits to retailers. If entry is accommodated, upstream competition leads to fierce down- stream competition and the breakdown of RPM. Hence, via RPM, retailers internalize the effect of accommodating entry on the incumbent's profits. Retailers may prefer not to accommodate entry; and, if entry requires downstream accommodation, entry can be deterred. We investigate when an incumbent would prefer to exclude, rather than collude with, the entrant and the effect of a retailer cartel. We also consider the effect of imperfect competition. Empirical and policy implications are discussed.