Resale Price Maintenance Without Services

26 Pages Posted: 22 Jan 2016 Last revised: 12 Apr 2016

See all articles by Wenzheng Mao

Wenzheng Mao

The University of Hong Kong

Travis Ng

The Chinese University of Hong Kong (CUHK) - Department of Economics

Date Written: February 18, 2016

Abstract

A valid defense of the use of resale price maintenance (RPM) in court now must explain how the RPM induces more services (or other non-pricing dimensions customers value). Often, however, services either do not play a significant role, or their significance is subject to debate. This happened in the 2013 China's RPM case of Rainbow v. Johnson & Johnson (J&J); J&J sold medical equipment to China's hospitals through various distributors but how significant was the distributors' services is debatable. We argue that J&J's RPM, even if it never elicited more services from its distributors, can be pro-competitive. We explain why the RPM did help J&J compete with other brands. We formalize our explanation in a model based on Winter (1993). The model has one upstream and two downstream firms. Unlike Winter (1993), the downstream firms only choose their prices but nothing else. Without services, there exist equilibria under which one downstream firm would under-price when the upstream firm offers a uniform wholesale price together with a lump-sum transfer. The upstream firm can curb such an under-pricing incentive by imposing a minimum RPM. In a numerical example, we show that the use of RPM without services can increase the welfare of both the whole supply chain and the consumers.

Keywords: resale price maintenance, free-riding, services hypotheses, antitrust

JEL Classification: L42, L51

Suggested Citation

Mao, Wenzheng and Ng, Travis, Resale Price Maintenance Without Services (February 18, 2016). Available at SSRN: https://ssrn.com/abstract=2720210 or http://dx.doi.org/10.2139/ssrn.2720210

Wenzheng Mao

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Travis Ng (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong

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