Resale price maintenance (RPM) is a vertical agreement or concerted practice between an upstream supplier and a downstream reseller (such as a retailer or distributor) that constrains or sets the resale price downstream. While RPM can have anticompetitive consequences when it involves a fixed or minimum price, its unclear effects and potential procompetitive justifications make it legally and economically contentious. This commentary summarises the seminal case law in the USA that has driven contemporary legal and economic thinking on fixed and minimum RPM, explains the main economic theories of harm and benefit, and closes off with a brief discussion of maximum, recommended and indirect RPM.
Fixed or minimum RPM was formerly treated with hostility. In its 1911 Dr Miles judgment, the US Supreme Court even imposed a per se prohibition. This case involved a producer of proprietary medicines setting the prices at which pharmacists could resell them. The Supreme Court rejected the defence that eliminating intra-brand competition on these medicines was required to ensure that pharmacists made sufficient profit in return for promoting the products. However, in its 2007 Leegin judgment, the US Supreme Court overturned Dr Miles and instead imposed a rule of reason approach to RPM. In this case, the Supreme Court accepted the defence that the discounting of certain leather accessories would harm the brand’s luxury image and undermine the ability of retailers to offer top-quality customer service. A further discussion on this case, including a link to EU competition law, is provided by Peeperkorn (2008).
In the EU, a fixed or minimum RPM is considered a ‘hardcore’ vertical restriction that does not enjoy a block exemption under the 2010 vertical block exemption regulation (or its 2021 draft update). However, as also clarified in the 2010 vertical guidelines (and their 2021 draft update), RPM may still be exempted under Article 101(3) TFEU.
Several economic theories of harm may justify a suspicious treatment of (fixed or minimum) RPM, depending on the case. First, RPM may benefit resellers by eliminating intra-brand competition (e.g. among competing retailers all selling Coca-Cola). This also means that resellers could advocate for RPM as a means to facilitate ‘hub-and-spoke’ collusion among themselves via a common supplier. This elimination of intra-brand competition may involve immediate harm to consumers through higher prices, but also dynamic harm because of reduced expansion by more efficient resellers (which benefit the most from competition).
At the same time, it is not always clear what the benefit would be to the supplier from an elimination of intra-brand competition: in a pure resell model, suppliers generally benefit from efficient distribution, lower retail prices, and higher output (although this may change when suppliers set two-part tariffs - see Rey and Vergé, 2010). Moreover, it is important to note that the effect on market outcomes from any reduction in intra-brand competition is smaller when there is stronger inter-brand competition (e.g. between Coca-Cola and Pepsi).
Second, RPM may facilitate collusion among competing suppliers by reducing price fluctuations in the downstream market and increasing price transparency (Jullien and Rey, 2007). The importance of monitoring in this coordination theory of harm is also recognised in the 2022 EU vertical guidelines, which point towards an increase in e-commerce price monitoring tools. RPM may also facilitate supplier collusion by reducing the ability for suppliers to profitably deviate through a reduction in wholesale prices - as fixed resale prices limit the subsequent demand increase.
Third, RPM may be used by a dominant supplier to foreclose smaller rivals by enabling higher margins for resellers and hence an incentive to favour the supplier’s brand over those of rivals when selling to customers. However, this works only if these rival suppliers do not have alternative routes to market. Moreover, supplier foreclosure may end up harming resellers by limiting their supply options - and hence require some form of retailer coordination failure to implement (Fumagalli, Motta and Calgano, 2018, Section 2.3.2).
Finally, a uniform RPM policy may be used to remove a procompetitive commitment problem on the side of the supplier: by committing to sufficiently high retail margins, the supplier may eliminate its own ability and incentive to attract additional competing resellers - the prospect of which would have resulted in any initial reseller already demanding lower wholesale prices (O’Brien and Shaffer, 1992). However, case law generally appears to sideline this theory of harm.
In parallel to the above theories of harm, there are ways in which restricting downstream price-setting may actually work to enhance inter-brand competition. First, when suppliers cannot enforce resellers’ pre-sale services by contract, RPM may be an effective alternative to eliminate the ability of low-cost resellers to free-ride on their competitors’ efforts to attract customer interest - enhancing (non-price) inter-brand competition. Second, RPM may increase resellers’ investment incentives by increasing their ability to appropriate value. This may be particularly relevant when upfront retailer investment is required - again increasing inter-brand competition. Third, fixed resale prices may be necessary to impose an effective brand-level pricing campaign - which may be procompetitive, provided that it is temporary and aimed at coordinating on low rather than high common prices.
Maximum and recommended RPM are generally regarded as less problematic than fixed and minimum RPM. This is because the above theories of harm do not apply. Moreover, maximum RPM may help to reduce the harm to both consumers and firms from double marginalisation (different levels of the supply chain all imposing a markup); and recommended RPM may help to overcome an informational disadvantage on what an appropriate resale price is. However, maximum or recommended RPM may still fall foul of competition law when it is perceived as fixed RPM or when it provides for an anticompetitive focal point.
Finally, it is worth noting that fixed or minimum RPM does not have to be imposed directly in order to infringe competition law. For example, in 2021 the Netherlands Authority for Consumers and Markets concluded that Samsung exercised ‘undue influence’ on several online retailers of Samsung television sets, despite a claim of price recommendations (and irrespective of any effects analysis). In contrast, in a 2014 decision by the UK Office of Fair Trading (now Competition and Markets Authority), it was concluded that price communication between a supplier of sports bras and major department stores did not infringe competition law, because the parties provided credible alternative explanations for their communications and there was no clear effect on price levels.