Exclusionary Minimum Resale Price Maintenance

Abstract

An upstream manufacturer can use minimum resale price maintenance (RPM) to exclude potential competitors. RPM lets the incumbent manufacturer transfer profits to retailers. If entry is accommodated, upstream competition leads to fierce downstream competition and the breakdown of RPM. Hence, via RPM, retailers internalize the effect of accommodating entry on the incumbent's profits. Retailers may prefer not to accommodate entry; and, if entry requires downstream accommodation, entry can be deterred. We also discuss empirical and policy implications, as well as the exclusionary potential of other methods of sharing profits between upstream and downstream firms, such as slotting fees and revenue sharing.