A Dynamic Analysis of Resale Price Maintenance: Inefficient Brand Promotion, Higher Margins, Distorted Choices, and Retarded Retail Innovation

Abstract:     
This article responds to Professor Benjamin Klein’s recently published article that describes a comprehensive procompetitive rationale for RPM - resolving the incentive incompatibility between the brand manufacturer and the retailers that sell that brand. Retailers commonly have insufficient incentive to carry and promote products that, if effective distribution were available, would be highly profitable to the manufacturer. The Klein article uses a manufacturer profit/output standard to argue that RPM resolves this incompatibility in a procompetitive manner. I accept Klein’s premise that RPM is a way of encouraging retailers to carry and promote the manufacturer’s brand, but challenge his measure of procompetitive effect as inconsistent with the Sherman Act’s focus on competition, not profitability for individual market participants. I further develop salient features of RPM that undercut the Klein thesis, including the inefficiency of RPM as a brand promotion tool, the inflated manufacturer margins commonly associated with RPM, and the stifling effect of RPM on innovative and efficient retailing. An analysis of six contemporary RPM cases illustrates these anticompetitive effects and provides robust support for a strong presumption that RPM is a violation of the Sherman Act.

Number of Pages in PDF File: 74

Keywords: antitrust law, sherman act, vertical restraints, resale price maintenance

JEL Classification: K21, L42, M31

working papers series