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

A minimum resale price maintenance agreement is a business practice in which a manufacturer sets a minimum price at which retailers must resell their products to consumers. This means that retailers cannot sell the product at a price lower than the agreed-upon minimum price. Minimum RPM agreements can be established either through formal contracts or informal agreements between the parties involved.

Minimum RPM agreements can reduce competition in the following ways: a) Price competition: Retailers are unable to compete on price since they must sell the product at or above the agreed minimum price. This can result in higher prices for consumers and a potential reduction in consumer welfare. b) Market entry barriers: RPM agreements can create barriers for new retailers to enter the market, especially if existing retailers have established relationships with manufacturers and can maintain higher margins due to the fixed resale price. c) Anti-competitive effects: In some cases, minimum RPM agreements can facilitate collusion between retailers or between manufacturers and retailers. If firms co-operate to maintain artificially high prices, consumers may end up paying more without any corresponding increase in the quality of goods or services provided.

Despite their potential negative effects on competition, minimum RPM agreements might be deemed acceptable in certain cases: a) Preventing free-riding: Minimum RPM agreements can help prevent ‘free-riding’ amongst retailers, wherein some retailers may take advantage of the investments made by other retailers in product promotion, staff training, and store presentation. b) Ensuring quality customer service: By setting a minimum resale price, manufacturers can incentivize retailers to provide a certain level of customer service, allowing for a consistent consumer experience with the product across all retail outlets. c) Supporting a brand's image: Some luxury or high-end brands may rely on minimum RPM agreements to maintain a specific brand image or perception of quality by ensuring that their products are not sold at a discount, which could have a negative impact on their reputation. d) Legal exceptions: In some jurisdictions, minimum RPM agreements may be acceptable under certain circumstances, such as for the introduction of a new product or when the agreement can be shown to have pro-competitive effects, such as increased inter-brand competition. Overall, the acceptability of minimum resale price maintenance agreements depends on the specific context and whether the potential pro-competitive benefits outweigh the known anti-competitive risks.