Vertical Price Restraints and Free Entry Under Asymmetric Information

In a vertically related market where the number of manufacturer-retailer hierarchies is endogenously determined by free entry, we investigate the impact of vertical price restraints on the free-entry equilibrium and its welfare properties under asymmetric information within each supply hierarchy. We compare the legal regimes of laissez-faire and ban on resale price maintenance (RPM) under different entry decision modes. When the entry decision occurs upstream, laissez-faire generates higher entry and increases consumer surplus, but a ban on RPM enhances total welfare. Socially excessive entry occurs under both legal regimes, and the entry bias declines with the severity of the asymmetric information problem. Conversely, when the entry decision occurs downstream, a ban on RPM stimulates entry and consumer surplus, but laissez-faire can be total welfare superior. Our results provide antitrust policy implications about vertical price control.