Resale price maintenance (RPM) is a controversial firm strategy whereby a manufacturer sets the price at which its distributors must sell its product to consumers. (Minimum RPM involves the manufacturer setting a price ﬂoor for its distributors, whereas maximum RPM involves the manufacturer setting a price ceiling.)
Following the U.S. Supreme Court’s 1911 decision in Dr. Miles, minimum RPM was a per se violation of Section 1 of the Sherman Act. (A per se violation means that harm to competition is presumed, that is, does not need to be proved.) The underlying concern was that RPM facilitates retailer and manufacturer collusion, by coordinating pricing and making monitoring easier.
In the 1980s and 1990s, a series of economists showed that RPM may actually have procompetitive effects. A good example of the possible benefits of RPM is illustrated in a recent New York Times article. Survey results show that “thirty-nine percent of people who bought books from Amazon … said they had looked at the book in a bookstore before buying it from Amazon, [a practice] known among booksellers as showrooming.” From an economics point of view, this implies an externality: investments by the brick-and-mortar bookstore benefit primarily the discount seller, leading to inefficient investment levels by the former. In this context, RPM may have the virtue of “internalizing” the retailer’s effort.
Reflecting this new thinking, the Supreme Court finally overturned the per se rule against minimum RPM in the 2007 Leegin case. RPM is now judged on a “rule of reason” basis, that is, balancing its pro and anti-competitive effects. In particular, while recognizing the efficiency effects of RPM, the Court continues to think that “a manufacturer with market power … might use RPM to give retailers an incentive not to sell the products of smaller rivals or new entrants.”
This idea of RPM as an exclusion strategy has been formalized and developed in an excellent recent research article by our colleagues John Asker and Heski Bar-Isaac. There you will find a more extensive treatment of the above points.
Written by Luis Cabral with thanks to Larry White and Heski Bar-Isaac.