Munich Personal RePEc Archive

Quantity Competition under Resale Price Maintenance when Most Favored Customers are Strategic

Aviv, Yossi and Bazhanov, Andrei and Levin, Yuri and Nediak, Mikhail (2016): Quantity Competition under Resale Price Maintenance when Most Favored Customers are Strategic.

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Abstract

Legal studies usually treat a policy of a manufacturer or retailer as socially harmful if it reduces product output and increases the price. We consider a two-period model where the first-period price is fixed by resale price maintenance (RPM) and resellers endogenously decide to use another "collusion suspect," meet-the-competition clause with a most-favored-customer clause (MFC), to counteract strategic customer behavior. As a result of MFC, second-period (reduced) price increases, and resellers' inventories decrease. However, customer surplus may increase and aggregate welfare increases in the majority of market situations. MFC can not only decrease the losses in welfare and resellers' profits due to strategic customers but, under reseller competition, may even lead to higher levels of these values than with myopic customers, i.e., to gains from increased strategic behavior. MFC may create "MFC-traps" for resellers, where one of possible market outcomes yields a gain from increased strategic behavior while another results in a reseller profit less than the worst profit in any stable outcome without MFC. With growing competition, benefits or losses from MFC can be higher than losses from strategic customer behavior.

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