Resale Price Maintenance,Retail Information And Product Quality

Resale price maintenance(RPM)can enhance market efficiency as well as restrain or even exclude competition.For this reason,it is controversial in the academic field of industrial organization and antitrust practice.Among the economic theories that explain the efficiency-enhancing effect of RPM,the service argument is the most important and influential one.According to the service argument,there are various externalities in the non-integrated vertical structure,which distort the supply of retail services compared to the integrated firm,which does not have any principal-agent problem.RPM helps to correct this distortion and improve efficiency.However,most theories in the service argument assume that consumers have certain special characteristics or behaviors.These theories assume,for example,that consumers rely heavily on retailers to provide information on product characteristics and user guidance,that consumers have the habit of freeriding,that consumers rely on retail brand to choose products,or that there is a clear heterogeneity in consumer preferences for prices and services.The service argument relies too much on making special assumptions for consumers,which greatly limits the explanatory power of it and brings difficulties to its practical application.This paper notices that traditional service argument only analyzes retail services provided by retailers to consumers,but does not consider the services that retailers provide for manufacturers,of collecting market information.In fact,the information provided by retailers plays an important role in the process of product quality improvement by manufacturers.Does this retail service of collecting market information have externalities as pointed out in the classic literature of vertical restraints?To answer this question,this paper establishes a two-period multi-stage game model in which one manufacturer and two imperfectly competing retailers,without any special assumption on consumers.In the first phase,retailers sell products while collecting market information.In the second phase,manufacturers make product quality improvements based on retailer information.The more complete the information,the greater the product quality improvement,and the improved product will be sold to consumers through two retailers.We solved the equilibrium of the model in three vertical relationships: integration,using only two-part tariff,and RPM plus two-part tariff.This paper finds: Firstly,in retailers collecting market information for manufacturers to improve product quality services,there is a problem of spillover-a retailer collects information and pays the cost of collection,promotes product quality improvement,will let this product better sold in all retailers in later phase.To put it simply,the cost of information collecting service is private but the benefit of it will spillover.Thus,this retail service for collecting information has a horizontal positive externality.In the second phase,all retailers can take the free rides provided by other retailers.As a result,the incentives for all retailers to collect market information will be insufficient comparing to integrated firm.Secondly,the positive externality of retail service in this paper is independent of the negative externality of retailer price competition.When price externalities do not exist,service externalities still make equilibrium deviate from the integrated optimum.This means that any vertical constraint that only limits retailer price competition does not help solve retail service distortions.In addition,in the non-integrated no-RPM case,since the wholesale price has to deal with both externalities at the same time,the wholesale price will also deviate from the production cost,resulting in a new vertical externality.The inter-period horizontal positive externalities of retail services,the current horizontal negative externalities of prices,and the vertical externalities of wholesale prices all contribute to the equilibrium deviation from integration optimum.Lastly,the RPM plus two-part tariff make all the final variables in the equilibrium consistent with the integrated optimum.This means that the RPM plus two-part tariff correct the distortions caused by these three externalities.The mechanism of this is that the two-part tariff makes the manufacturer's objective function consistent with the integrated manufacturer;RPM directly eliminates the externality of the retailer's price competition,and at the same time blocks the reaction of the retail price to the wholesale price,so that the wholesale price can be properly adjusted to solve the retail service incentive problem.At least in some cases,consumer welfare are improved by using RPM plus two-part tariff.To summarize,this paper shows that the basic conclusions of service theory are true even when no special assumptions are made about consumers.As long as retailers' efforts to collect market information to help manufacturers improve product quality,this retail service may have externalities;RPM plus two-part tariff can correct this distortion and improve retailer service level and product quality and may increase consumer welfare.Finally,the paper also proposes some policy recommendations based on the conclusions provided by the model.