The 'Services' Explanation for Resale Price Maintenance (RPM): Deleterious Results Missed in the Economics Literature and in Legal Decisions

Abstract

Policy discussions and a Supreme Court decision interpret retailer services induced by retail price maintenance (RPM) as enhancing consumer surplus (CS) and welfare enhancing, marginalizing dissenting opinions which use similar models but with different parameters. However if presales services stimulate demand by providing information about a product's value they need not raise post sale value in use. Inframarginal consumers' presales perceived value may increase, but their post sale value may be unchanged so their supposed CS gains are ephemeral, their actual surplus falls proportional to price increase. We show, even adding in gains to marginal consumers, effects on CS are far more negative than conceived of in this literature. Consequently, in a rule of reason antitrust environment, if RPM is challenged without alleging collusion or exclusion, presales demand inducing information provision is a flimsy defence if CS is the standard, and not always convincing if total surplus is the standard.

Keywords: Resale Price Maintenance, Welfare Effects

JEL Classification: L42