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].
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
