Biased sales advice , common agency , manufacturer dilemma , matching , retail service , RPM , vertical restraints
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.
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