Recommended retail prices, maximum RPM and the role of buyer power

We consider vertical price restrictions like Recommended Retail Prices (RRP) and Resale Price Maintenance (RPM), together with a retailer's unit discount when purchasing the good from the manufacturer. We study how retailer's buyer power affects the nature of the vertical price restriction occurring in equilibrium. When retailer's buyer power is small, RRP can be an equilibrium solution, but a Maximum RPM would be preferable from a welfare point of view because it could eliminate the double marginalization problem. When retailer's buyer power is high, a Maximum RPM occurs in equilibrium but RRP would enhance welfare because, although not correcting for double marginalization, it would avoid giving to the retailer a too high unit discount when purchasing the good. With RPM instead, retail prices will be very high, thus hurting consumers. Only when the parties' bargaining power is countervailed, society can benefit from the elimination of double marginalization without suffering for a too high unit discount given to retailers. The famous Galbraith countervailing power conjecture is at work in this framework.