Resale price maintenance
| Resale price maintenance |
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Resale price maintenance is a business practice, whereby the price of an item is established and set by the manufacturer and both the distributors and retailers must sell the manufacturer's good at or higher price than minimum resale price (floor price) or at or lower than maximum resale price (price ceiling). Resale price maintenance is used by the manufacturers mostly to prevent internal price competition among retailers.
If any retailer or distributor breaks the mutual agreement of price maintenance in a hidden or explicit manner, the manufacturer has the right to stop doing business with that particular retailer of distributor immediately or demand compensations from those parties.
Maintaining resale prices prevents strong price competition on the market and makes smaller distributors and retailers less vulnerable against bigger competition. In comparison to bigger businesses, small retailers usually cannot use large scale to achieve more profit even when using lower price.
Manufacturers support the maintenance of prices because it ensures that the market is fair to all retailers and therefore gains the same profits from the sales of the manufacturer's product. Otherwise, strong competition on price could reduce the price and profit significantly for retailers and ultimately hurting the producers[1].
Some argue, that from competition rules point of view, MRP can be concerning, because it may give the supplier a sort of control over the market of the product. On the other hand, manufacturers may want to protect the image of the brand or product and prevent using their goods as a loss leaders to boost sales of different products. MRP also prevents free riding by retailers and puts emphasis on competing on different aspects of the retail business such as customer service[2]
Price floor
Price floors are price controls that are introduced by the government when goods or services are sold at too low price. Price floors can cause demand shortages and to high supply. They reduce demand by raising prices higher than those normally determined by the manufacturer. Its main aim is to increase the company's interest in manufacturing the goods and increase overall market supply. The most common price floor relate to minimal wage regulations.
Price ceiling
A price ceiling, also called price cap is a mandatory maximum price that a seller can charge for a product or service. Normally determined by law, price caps are usually used only for articles such as:
- food
- energy products
Governments decide to implement price ceilings, when such goods become inaccessible to ordinary consumers. There are examples of areas where there are rent ceilings that prevent tenants from raising rental prices[3].
Examples of Resale price maintenance
- Manufacturer A may set a resale price of a product at $25 and require that all retailers must sell the product at no less than the established price.
- Manufacturer B may set a minimum resale price of a product at $20 and establish a maximum resale price of $30, allowing retailers to sell the product at any price between the two.
- Manufacturer C may set a minimum resale price of a product at $25, but also provide discounts for retailers that agree to sell the product at a higher price of $30.
- Manufacturer D may set a maximum resale price of a product at $50 and require that all retailers must sell the product at no more than the established price.
- Manufacturer E may set a minimum resale price of a product at $20, but also provide incentives for retailers that agree to sell the product at a lower price of $15.
Advantages of Resale price maintenance
Resale price maintenance is a beneficial business practice which can support the manufacturer in a number of ways. Advantages of resale price maintenance include:
- Ensuring that the manufacturer’s products are sold at a certain price, allowing them to maintain a certain level of product quality while still making a profit.
- Creating stability in the marketplace, as there is a set price for the products, and customers can more easily compare prices and make informed choices.
- Increasing customer loyalty, as customers are more likely to buy from the same retailer if they know that the price is consistent.
- Allowing the manufacturer to control their brand image, as the same prices are being offered for their products no matter where it is sold.
- Promoting fair competition between retailers, as they are all selling at the same price and no one has an unfair advantage.
Limitations of Resale price maintenance
Resale price maintenance has various limitations. These include:
- It can lead to higher prices for consumers due to the lack of competition between retailers.
- It can lead to reduced choice for consumers, as retailers may stock fewer products due to the mandated prices.
- It can lead to higher costs for distributors and retailers, as they are unable to offer discounts to customers and must adhere to the resale price set by the manufacturer.
- It can lead to reduced profits for distributors and retailers as they are unable to set their own prices.
- It can lead to unethical business practices, such as collusion between manufacturers and retailers to set prices.
- It can lead to a decrease in innovation and development in the industry, as manufacturers and retailers are unable to take risks and offer different products at different prices.
- Introduction:
Here is a list of other approaches related to Resale Price Maintenance:
- Minimum Advertised Price (MAP): MAP is a policy used by manufacturers to set the minimum price at which products can be advertised by retailers. This policy helps to promote uniformity in prices and prevents retailers from undercutting each other.
- Minimum Retail Price (MRP): MRP is similar to MAP, but it sets the minimum price at which the product can be sold. This helps to prevent retailers from discounting products and driving prices down.
- Recommended Retail Price (RRP): RRP is the manufacturer's suggested price for a product. It is not a fixed price and retailers are free to set their own prices, but it can help to create a consistent pricing structure across retailers and discourage discounting.
- Price Discrimination: Price Discrimination is a strategy used by manufacturers to charge different prices to different customers. This can help to maximize profits by targeting different customer segments with different pricing tiers.
- Summary:
In summary, Resale Price Maintenance is just one of the many strategies that manufacturers use to control pricing and ensure consistency across retailers. Other strategies include Minimum Advertised Price (MAP), Minimum Retail Price (MRP), Recommended Retail Price (RRP), and Price Discrimination.
Footnotes
References
- Galtier F., (2013). Managing food price instability: Critical assessment of the dominant doctrine "Global Food Security", V. 2, I. 2, p. 72-81
- Gundlach G. T., Cannon J. P., Manning K. C., (2010). Free Riding and Resale Price Maintenance: Insights from Marketing Research and Practice "The Antitrust Bulletin", V. 55, I. 2, p. 381-422
- Lao M., (2010). Resale Price Maintenance: The Internet Phenomenon and Free Rider Issues "The Antitrust Bulletin", V. 55, I. 2, p. 473-512
- Rey P., Verge T., (2010). Resale price maintenance and interlocking relationships "The Journal of industrial economics", V. 58, I. 4, p. 928-961
Author: Jan Kaptur
