Can resale price maintenance and franchise fees correct sub-optimal levels of retail service?

Martin K. Perry, Robert H. Porter

Research output: Contribution to journalArticlepeer-review

Abstract

This paper examines resale price maintenance by a monopoly manufacturer who sells its product through monopolistically competitive retailers. The retailers also provide service, but there is an externality in its provision. If the manufacturer sets only a wholesale price, the externality results in too little service, and the addition of RPM will not correct this. Maximum RPM is used only to correct the successive monopoly problem with no effect on service. However, if the manufacturer can also set a franchise fee, too little service arises when the externality is large. Minimum RPM will correct this, increasing both profits and consumer surplus. This partially confirms the Telser (1960) argument for RPM. When the externality is small, retailers provide too much service, and the 'vertical externality' argument is invalid. These results suggest that the insights from simple vertical models may not generalize to models which allow other dimensions of non-price competition among retailers.

Original languageEnglish (US)
Pages (from-to)115-141
Number of pages27
JournalInternational Journal of Industrial Organization
Volume8
Issue number1
DOIs
StatePublished - 1990
Externally publishedYes

ASJC Scopus subject areas

  • Industrial relations
  • Aerospace Engineering
  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management
  • Industrial and Manufacturing Engineering

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