Resale Price Maintenance and Manufacturer Competition for Retail Services

Resale price maintenance (RPM) arises when a manufacturer fixes the price at which retailers resell the manufacturer’s products. There is wide consensus among policymakers and economists that RPM can facilitate collusion among manufacturers and among retailers. RPM can also be used by a manufacturer to exclude more efficient rivals.

Yet the US Supreme Court overturned the long standing per-se illegality of minimum RPM with the Leegin decision of 2007. Courts now have to judge minimum RPM under the rule of reason. On the other side of the Atlantic, the European Commission decided to keep minimum and fixed RPM as core restrictions of competition in the renewed vertical block exemption of 2010, but the guidelines now specify when minimum RPM may be legal.

The dominant efficiency defense both in Leegin and the European guidelines are service incentives: A manufacturer uses minimum RPM to provide retailers with the appropriate incentives for socially desirable services that would be under-provided with price competition. The economic foundation of this argument rests on models with a single manufacturer. Yet in many RPM cases, including Leegin, competing manufacturers sell through common retailers.

With this paper, we shed light on the effects of RPM when competing manufacturers sell their products through common retailers who provide sales services. We set up a model which shows that 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.

Competition policy has to distinguish between cases in which externalities yield an insufficient level of retail services and cases in which the service level is sufficient or even better without RPM. The danger is that competition policy relies too much on the established service arguments with a single manufacturer, which suggest that minimum RPM increases efficiency. Within our model, raising retail margins of only one product through minimum RPM indeed induces retailers to allocate more services to that product. Hence a manufacturer can demonstrate that minimum RPM is effective in increasing services for its product. However, if our model applies, minimum RPM does not induce any efficiency gains in equilibrium, but increases retail prices and can even decrease the quality of service.

Hunold, Matthias and Johannes Muthers (2012), Resale Price Maintenance and Manufacturer Competition for Retail Services, ZEW Discussion Paper No. 12-028, Mannheim.