Friday, June 29, 2012
Posted by D. Daniel Sokol
Matthias Hunold (ZEW) and Johannes Muthers (Wurzburg) discuss Resale price maintenance and manufacturer competition for retail services.
ABSTRACT: We investigate the incentives of manufacturers to use resale price maintenance (RPM) when selling products through common retailers. In our model retailers provide product specific pre-sales services. If the competitive retail margins are low, each manufacturer fixes a minimum price to induce favorable retail services. With symmetric manufacturers, products are equally profitable in equilibrium and no product is favored as without RPM, but retail prices are higher. We show that minimum RPM can create a prisoner's dilemma for manufacturers without increasing, and possibly even decreasing the overall service quality. This challenges the service argument as an efficiency defense for RPM.