Resale price maintenance (RPM) is a vertical restraint in which a manufacturer sets the minimum price at which a retailer can sell its product. This practice aims to prevent price competition among retailers and maintain the manufacturer's desired price level for its goods.
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Resale price maintenance is often used by manufacturers to prevent 'price wars' among retailers, ensuring a stable and predictable retail price for their products.
RPM can help maintain the brand image and perceived value of a product by preventing deep discounting and preserving profit margins for retailers.
In many countries, resale price maintenance is considered an anticompetitive practice and is subject to antitrust regulations or outright bans.
Proponents of RPM argue that it can promote interbrand competition and ensure a stable, reliable distribution network for manufacturers.
Critics of RPM claim that it reduces intrabrand competition, leading to higher prices for consumers and limiting their choice.
Review Questions
Explain how resale price maintenance affects competition among retailers.
Resale price maintenance eliminates price competition among retailers by setting a minimum price at which they can sell the manufacturer's product. This prevents retailers from undercutting each other on price, which can lead to higher consumer prices and reduced choice. RPM allows the manufacturer to maintain control over the retail price and prevent 'price wars' among its distributors, but it can also limit intrabrand competition and reduce the ability of retailers to offer discounts or promotions.
Describe the potential benefits and drawbacks of resale price maintenance from the perspective of manufacturers and consumers.
From the manufacturer's perspective, resale price maintenance can help maintain the brand image and perceived value of their products, ensure a stable distribution network, and prevent 'price wars' among retailers. However, critics argue that RPM reduces intrabrand competition and can lead to higher consumer prices. Consumers may benefit from the stable pricing and reliable availability of products, but they may also be denied the opportunity to find lower prices through competition among retailers. The overall impact of RPM on consumer welfare is a subject of debate among economists and policymakers.
Evaluate the role of antitrust regulations in addressing the potential anticompetitive effects of resale price maintenance.
Many countries have antitrust or competition laws that address the potential anticompetitive effects of resale price maintenance. These laws often prohibit or heavily restrict the use of RPM, as it is considered a form of vertical restraint that can limit competition and harm consumer welfare. Regulators must balance the potential benefits of RPM, such as maintaining brand image and ensuring a stable distribution network, with the potential drawbacks of reduced intrabrand competition and higher prices. The application of antitrust laws to RPM often involves a careful analysis of the specific market conditions and the overall impact on competition and consumer choice.
Related terms
Vertical Restraint: A vertical restraint is a restriction imposed by a manufacturer or supplier on a retailer or distributor regarding the conditions under which the product can be sold.
Minimum Resale Price: The minimum price set by a manufacturer that a retailer must charge consumers for a particular product.
Price Competition: The process by which retailers compete on the basis of price to attract customers and gain market share.