An 'Image Theory' of RPM

33 Pages Posted: 26 Apr 2019

See all articles by Roman Inderst

Roman Inderst

Goethe University Frankfurt

Sebastian Pfeil

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)

Date Written: April 2016

Abstract

We show how a brand manufacturer's control over retail prices can lead to efficiencies when consumers rely on prices as a signal of quality. For this we first show how higher prices can be associated with both higher quality perception as well as higher actual quality. We next identify a conflict of interest between retailers and manufactures. Retailers do not internalize the ensuing reputation spill-over that higher prices have on demand at all outlets. And they have less incentives to support brand image through higher prices as this erodes their own position in negotiations while increasing that of the manufacturer. Our efficiency defence for RPM thus applies even when retailers need not be incentivized to undertake non-contractible activities, as in our model the key opportunism problem, with respect to quality provision, lies between the manufacturer and consumers.

Suggested Citation

Inderst, Roman and Pfeil, Sebastian, An 'Image Theory' of RPM (April 2016). Available at SSRN: https://ssrn.com/abstract=3360950 or http://dx.doi.org/10.2139/ssrn.3360950

Roman Inderst (Contact Author)

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60629
Germany
+49 (69) 798-34601 (Phone)
+49 (69) 798-35000 (Fax)

HOME PAGE: http://www.wiwi.uni-frankfurt.de/en/departments/finance/lehrstuhl/prof-dr-roman-inderst/team

Sebastian Pfeil

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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