Resale Price Maintenance Without Services

Abstract

A valid defense of the use of resale price maintenance (RPM) in court now must explain how the RPM induces more services (or other non-pricing dimensions customers value). Often, however, services either do not play a significant role, or their significance is subject to debate. This happened in the 2013 China's RPM case of Rainbow v. Johnson & Johnson (J&J); J&J sold medical equipment to China's hospitals through various distributors but how significant was the distributors' services is debatable. We argue that J&J's RPM, even if it never elicited more services from its distributors, can be pro-competitive. We explain why the RPM did help J&J compete with other brands. We formalize our explanation in a model based on Winter (1993). The model has one upstream and two downstream firms. Unlike Winter (1993), the downstream firms only choose their prices but nothing else. Without services, there exist equilibria under which one downstream firm would under-price when the upstream firm offers a uniform wholesale price together with a lump-sum transfer. The upstream firm can curb such an under-pricing incentive by imposing a minimum RPM. In a numerical example, we show that the use of RPM without services can increase the welfare of both the whole supply chain and the consumers.

Keywords: resale price maintenance, free-riding, services hypotheses, antitrust

JEL Classification: L42, L51