Resale price maintenance (RPM)


Institution Definition

Agreements or concerted Practices between a supplier and a dealer with the object of directly or indirectly establishing a fixed or minimum price or price level to be observed by the dealer when reselling a product/service to his customers. A provision which foresees resale price maintenance will generally be considered to constitute a hard core restriction. In the case of contractual provisions or concerted practices that directly establish the resale price, the restriction is clear cut. However, resale price maintenance can also be achieved through indirect means: for example by fixing the distribution margin or the maximum level of discount the distributor may grant from a prescribed price level, by making the supplier’s rebates or his reimbursement of promotional costs subject to the observance of a given price level, by linking the prescribed resale price to the resale prices of competitors, or by threats, warnings, or even sanctions against a dealer who does not respect a certain price level (such as penalties, delay or suspension of deliveries or termination of contracts). European Commission

A supplier specifying the minimum (or maximum) price at which the product must be re-sold to customers. From a competition policy viewpoint, specifying the minimum price is of concern. It has been argued that through price maintenance, a supplier can exercise some control over the product market. This form of vertical price fixing may prevent the margin from retail and wholesale prices from being reduced by competition. However, an alternative argument is that the supplier may wish to protect the reputation or image of the product and prevent it from being used by retailers as a loss leader to attract customers. Also, by maintaining profit margins through RPM, the retailer may be provided with incentives to spend greater outlays on service, invest in inventories, advertise and engage in other efforts to expand product demand to the mutual benefit of both the supplier and the retailer. RPM may also be used to prevent free riding by retailers on the efforts of other competing retailers who instead of offering lower prices expend time, money and effort promoting and explaining the technical complexities or attributes of the product. For example, one retailer may not reduce price but explain and demonstrate to customers the use of a complex product such as a computer. The customer may after acquiring this information choose to buy the computer from a retailer that sells it at a lower price and does not explain or demonstrate its uses. In many countries, RPM is per se illegal with few exceptions or exempt products. Many economists now advocate adopting a less stringent approach in competition law towards RPM and other vertical restraints. © OECD

See Vertical restrictions

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