Question

What is a minimum resale price maintenance agreement? How might it reduce competition and when might it be acceptable?

Short answer

A minimum resale price maintenance agreement (RPM) is a vertical agreement between manufacturers and retailers where the manufacturer sets a minimum price at which the retailer can sell their products to maintain the brand's image and prevent price wars. While such agreements can negatively impact competition by limiting price competition, discouraging better services, and potentially leading to higher consumer prices, they may be acceptable in situations where they enhance efficiency, promote innovation, support retailers' investment in new products, or protect the manufacturer's brand image.

Step-by-step solution

Define minimum resale price maintenance agreement

A minimum resale price maintenance agreement (RPM) is a type of vertical agreement between manufacturers and retailers where the manufacturer sets a minimum price at which the retailer can sell their products. This is usually done to maintain the brand's image and prevent price wars among retailers.

Understand the impact on competition

As minimum RPM agreements involve setting a floor price for products, they may have a negative impact on competition. If retailers aren't allowed to compete on price, they might be less motivated to offer better services or promotions to customers. Additionally, as the lower limit on prices ensures a certain profit margin for retailers, there may be fewer incentives for them to cut costs and offer products at lower prices. This can lead to higher prices for consumers and, in some cases, may be perceived as anti-competitive, as they may reduce consumer surplus.

Identify when a minimum RPM agreement might be acceptable

Despite their potential negative impact on competition, there are situations when minimum resale price maintenance agreements might be acceptable. For example, if a new or innovative product requires retailers to invest in training, promotions, or other forms of support, these agreements can ensure that retailers receive a fair return on their investment. Additionally, if a manufacturer's reputation or brand image is important to the product's value, maintaining the prices at a certain level might prevent damage to the brand. In some jurisdictions, minimum RPM agreements are allowed if they can be proven to enhance efficiency, promote innovation, or lead to other benefits that outweigh their potential harm to competition.

Key concepts

Vertical Agreements

Vertical agreements are contracts between companies at different levels in the supply chain, such as manufacturers and retailers. These agreements often define terms of sale, distribution, and pricing.

For instance, in a minimum resale price maintenance agreement, a manufacturer may set a limit on the minimum price a retailer can sell a product to sustain brand image or to avoid price undercutting. While these agreements can compartmentalize distribution and uphold product value, overuse of such controls can lead to a stifling of market freedom and reduced competition. Careful consideration and regulation of vertical agreements is vital to maintain market health.

Competition in Markets

Healthy competition in markets drives innovation, quality, and fair pricing. It benefits consumers by offering a variety of choices and encourages businesses to improve. However, minimum resale price maintenance agreements can dampen this competitive spirit by setting price floors.

Restricting price fluctuations might safeguard margins but can also eliminate cost-based competition among retailers. This can create a quasi-monopolistic situation where the price, instead of consumer demand and cost of production, dictates market trends. It is essential that markets are regularly reviewed to ensure that such practices do not harm the economic environment.

Consumer Surplus

Consumer surplus represents the difference between what consumers are willing to pay for a good or service and what they actually pay. It is a measure of consumer satisfaction and economic welfare.

A minimum resale price maintenance agreement could shrink consumer surplus because it prevents the product's selling price from dropping below a certain threshold, thus potentially keeping prices artificially high. This spells less savings for the consumer even if they are willing to spend less, reducing overall consumer welfare and possibly leading to decreased sales volumes if the product is deemed too expensive.

Anti-Competitive Practices

Anti-competitive practices are actions by businesses that unfairly limit competition and control prices, which can hurt consumers and the economy. These can take many forms, including cartels, monopolies, and yes, minimum resale price maintenance agreements if misused.

These agreements can be seen as anti-competitive because they may dissuade retailers from lowering prices, leading to less choice and higher costs for consumers. However, it is recognized that in certain cases, they can foster innovation or ensure service quality. To strike a balance, these practices are scrutinized and regulated under competition law to prevent abuse while allowing legitimate business strategies that can benefit the market ecosystem.