An "Image Theory" of RPM

Inderst, Roman and Pfeil, Sebastian (2014): An "Image Theory" of RPM.

Abstract

We show how a brand manufacturer’s control over retail prices can lead to efficiencies when consumers rely on prices as a signal of quality. For this we first show how higher prices can be associated with both higher quality perception as well as higher actual quality. We next identify a conflict of interest between retailers and manufactures. Retailers do not internalize the ensuing reputation spill-over that higher prices have on demand at all outlets. And they have less incentives to support brand image through higher prices as this erodes their own position in negotiations while increasing that of the manufacturer. Our efficiency defence for RPM thus applies even when retailers need not be incentivized to undertake non-contractible activities, as in our model the key opportunism problem, with respect to quality provision, lies between the manufacturer and consumers.

• Item Type: MPRA Paper
• Language: English
• Keywords: Resale Price Maintenance; Quality Incentives; Quality Image
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality ; Standardization and Compatibility; L - Industrial Organization > L4 - Antitrust Issues and Policies > L42 - Vertical Restraints ; Resale Price Maintenance ; Quantity Discounts

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