What is a minimum resale price maintenance agreement? How might it reduce competition and when might it be acceptable?

A minimum resale price maintenance (RPM) agreement is a type of arrangement between a manufacturer and its distributors or retailers, where the manufacturer sets a minimum price that its products cannot be sold below. This minimum price is often referred to as the "floor price" and aims to prevent aggressive price competition among retailers.

A minimum RPM agreement can reduce competition in the following ways: 1. It prevents retailers from lowering their prices to attract customers, leading to less price competition. 2. Smaller retailers with lower overheads generally have more flexibility in offering lower prices, but a minimum RPM takes away this competitive advantage. 3. The presence of a minimum resale price may lead to collusion among retailers, as they collectively agree to maintain prices above the floor price, depriving consumers of competitive prices.

Despite the potential anticompetitive effects, there are a few situations where minimum resale price maintenance agreements might be considered acceptable: 1. To protect brand value: In some cases, excessively steep discounts on a product can damage the brand's image and perception of value, so an RPM may be necessary to maintain a baseline level of perceived quality and value. 2. To support smaller retailers: Imposing a minimum resale price can help smaller, independent retailers who may not have the same bargaining power or economies of scale as larger retailers, allowing them to compete on a more level playing field. 3. To foster competition in other aspects: When price competition is restricted, businesses may instead compete in terms of product quality, customer service, and other factors that ultimately benefit consumers. However, it is also essential to note that such agreements may be subject to scrutiny from competition authorities, depending on the specific regulations in a given country.