Retail Service,
Consumer heterogeneity,
and Resale Price Maintenance
Zili Wang
Jian Chen
Institute of Industrial Economics/Institute of competition
and regulation
Jiangxi University of Finance and Economics
I. Introduction
Why should manufacturers want RPM is
still a puzzle.
manufacturer
w
w
A
B
Higher price
with service
A
Higher price
with service
B
Lower price
without service
Higher price
with service
Free riding
A
B
A
without RPM
B
with RPM
A
B
Higher price
with service
?
Lower price
without service
?
Free riding
?
A
?
B
The previous articles supporting that RPM
is reasonable are roughly divided into two
parts.
——about how to increase special service
: free-riding( Telser JLE,1960),“quality
certification” argument , (Marvel &
McCafferty. RAND,1984) /horizontal and
vertical externality(Mathewson &Winter.
RAND,1984) /contract mechanism, (Klein
& Murphy. JLE,1988. Shaw. SEJ, 1994) /
consumer heterogeneity.
(Winter.1993,QJE. Hamilton.1990)
——about competition : inter and intra-brand
competition.(Posner,1981.Easterbrook,1984)
/barrier to intra-brand competition（Comanor
&Rey，2000；Rey,2010;Wanghao，2004)/
price discrimination.(Chen. RAND,1999) service
to intra-brand competition.
(winter,QJE,1993.Schulz,JITE ,2006.
Liuzichen,2012)
No single specific theory could explain
consistently all instances of practice
(Ippolito, 1991. Giovannetti & Magazzini,
2013).
Usually service is to be considered as
useful to all consumers.
This paper assumes that retail service just
influences some of consumers
II. The Model
Manufacturer c/i
A
Brand marginal consumer
j/i
j/i
i
i
Brand preferential consumer
B
II. The Model
Definition 1:
consumers are brand preferential of the
good if their utility for product meet the
condition
Their demand function is:
Their demand function is
All assumptions are similar to Hotelling
model and:
the amount of the brand preferent
consumer is normalized to 1, the amount
of the brand marginal consumer is k, both
of them have the same reservation utility U
and they will buy one unit of product at
most. Manufacturer sets wholesale price w
. Unit transport cost is t.
Profit functions are respectively:
Both retailer service
Manufacturer c/i
A
Brand marginal consumer
j/i
j/i
i
i
Brand preferential consumer
B
When ρ=0, the optimal solutions are the
same with the Hotelling model:
III Homogeneous Retailers and
Service Competitive Equilibrium
Manufacturer c/i
PA
A
PB
Brand marginal consumer
j/i
j/i
i
i
Brand preferential consumer
only one retailer service(free-riding)
B
III Homogeneous Retailers
and Service Competitive
Equilibrium
we have:
both of A and B supply service and no
free-riding happen.
The brand preference consumer “free-ride”
and neither retailer would supply service.
Under RPM, the service level is decided
by:
Figure I
The condition of RPM under Homogeneous retailer structure
Proposition 1 Under the homogeneous
retail market structure,
(a) the necessary condition for
manufacture to impose RPM is
;
(b) no “free-rider”.
Corollary 1: Under the homogeneous
retail market structure, the lower the k, or t
,or
, or the higher the c , the more
reasonable is for manufacturer imposes
RPM to promote the retail service levels.
IV. Heterogeneous Retailers
and Retail Service Equilibrium
The profit functions and the optimal profits
of retailers and manufacturer are:
Only one retailer service
Manufacturer c/i
PA
A
PB
Brand marginal consumer
j/i
B
i
i
Brand preferential consumer
Figure II
Equilibrium Partition of Retail Service under Heterogeneous retailer structure
Proposition 2: By setting price floor, RPM
restricts the price competition between
specialty retailer and general retailer and
strengthens the retail service of general retailer.
Corollary 2: When retailers are heterogeneous,
the higher the k, or the lower the t, or the
bigger the
, the more reasonable is for
manufacturer to implement the MRPM.
V Discussion
The introduction of consumer
heterogeneity can properly answer many
long-standing puzzles about "free-rider“.
——Why “no gift”?
——Why retailer want RPM?
——Why “jeans”?
——Why pharmaceutical industry?
This theory is testable
—— The dissolution of the British book
trade RPM agreement (NBA)
What is the significance of this hypothesis
to the implementation of anti-trust policy?
——Monsanto vs Spray-Rite
VI Conclusion
Our study shows:
——what free-riding really means;
——proportion of marginal consumer(k)
plays opposite affects for RPM when
retailers’ structure is heterogeneous or
homogeneous.
——clear implications of k, t, p-w for the
antitrust policy.
——most of previous arguments are
consistent to this new explanation.
Thank
you