Vertical Restraints and the Forgotten Function of Prices in Brand Management

Abstract

In this article the forgotten role of prices in the analysis of vertical effects is described. While at least some vertical restraints have the potential to entail anticompetitive harm, it is demonstrated that competition law may be overshooting the mark if no account is taken of both, the rather fundamental use of price as a signal of quality and of the important function prices play for manufacturers in their overall “marketing mix” decisions. The article reviews the theoretical and empirical literature demonstrating a well-established link between price and quality. More generally, price is recognized by both practitioners and marketing scholars as a key part of a product’s brand image and, as such, as a key “cue” for consumers. It is thus far more than a simple transfer between consumers and firms, implying that a lower price is not always beneficial for efficiency and consumer welfare. As a result there is a risk of curtailing the possibilities available to brand manufacturers to successfully develop a high quality brand and experiment with different distribution approaches in a changing market place.

Keywords: RPM, dual pricing, cue, marketing mix, quality, quality perception, vertical restraints, vertical block exemption, brand, Veblen good, conspicuous consumption

JEL Classification: K21, L42, L40