Endogenous Maximum RPM, Recommended Retail Prices and the Role of Buyer Power

This paper investigates whether, and under which conditions, in a vertical structure it would be preferable to guarantee the retailer the ability of setting retail prices–by permitting only a Recommended Retail Price (RRP)–or rather, to give it to the manufacturer, by permitting also a Maximum Resale Price Maintenance (RPM). This issue has been crucial in important antitrust disputes on vertical maximum price fixing, but it has not been studied theoretically. This paper aims at filling this gap, looking also at the effect of buyer power on the vertical price restriction. It is shown that the manufacturer can offer the retailer a high unit discount to induce her to accept a Maximum RPM and that RRP can be an equilibrium solution either when buyer power is very low or very high. In the intermediate case when buyer and seller power are balanced–the famous Galbraith conjecture–an equilibrium maximum RPM endogenously occurs. The latter would be the best situation for society. Hence we find no reason, unlike the current attitude of antitrust authorities, to prefer RRP to maximum RPM.