Recommended Retail Prices, Maximum RPM and the Role of Buyer Power

The study investigates the effect of buyer power on vertical price re-strictions such as Recommended Retail Prices (RRP) and Maximum Resale Price Maintenance (RPM). Buyer power affects both the level of the unit discount obtained by the retailer when purchasing goods from the manufacturer and the retail price control. We show that only when a retailer’s buyer power is small can RRP be an equilibrium so-lution while, if buyer power is high, Maximum RPM occurs. RRP is dominated, from a welfare point of view, by Maximum RPM, since the latter eliminates double marginalization. Hence we find no reason, unlike the current attitude of antitrust authorities, to prefer RRP to Maximum RPM. The presence of buyer power gives rise to a second distortion, the unit discount, which does not enable any vertical price restriction to achieve its first best outcome. The best situation for society, in this second best world, arises when the parties ’ bargaining power is curbed, as claimed by the famous Galbraith conjecture