Branding, Quality, and 'Price Ownership' through RPM
33 Pages Posted: 14 Feb 2014
Date Written: August 2013
Manufacturers constantly make decisions that crucially affect product quality, e.g., through procuring high-quality inputs or maintaining high hygienic standards in production. We show fi rst how a high price for its product increases a manufacturers incentives, so that there is a positive relationship between quality and price. We then point out a conflict of interest between retailers and the manufacturer in the choice of the final price. Retailers do not internalize the reputation spill-over that higher prices have on demand at all outlets and they have, in addition, less incentives to support brand image through higher prices as this erodes their own outside option while increasing that of the manufacturer. "Price ownership" by the manufacturer, as supported by RPM, can then lead to higher quality, higher overall efficiency, and possibly also higher consumer surplus even when prices are higher.
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