Demand uncertainty and price maintenance

Flath, David; Nariu, Tatsuhiko

When retailers must commit to shipment quantities prior to resolution of demand uncertainty, manufacturer stipulation of a minimum retail price is likely to be profitable for the manufacturer, and not damaging to the retailers. The reason is simple: If demand turns out to be low, the unfettered market-clearing price can lie below the price that maximizes total sales revenue. A minimum retail price that is binding in the low demand state can thus increase total revenue even though it saddles retailers with unsold merchandise. This "new" insight of Deneckere, Marvel, and Peck is actually a straightforward generalization of the model of full manufacturer reimbursement for returns developed in Flath and Nariu (1989). The ubiquity of full reimbursement for returns in Japan even though it is in theory merely a second-best way of achieving minimum retail price stipulations, reveals important aspects of manufacturer maintenance of retail prices having to do with enforcement problems, the allocation of risk-bearing and economic incentives. These aspects of resale price maintenance are relevant to the normative evaluation of the special exemptions for RPM that Japan's Fair Trade Commission has long maintained but is now phasing out.

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Academic Units
Center on Japanese Economy and Business
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Center on Japanese Economy and Business Working Papers, 149
Published Here
February 9, 2011