Resale Price Maintenance
Resale price maintenance refers to a contractual arrangement between the manufacturer of a product and its distributor whereby the distributor agrees that they will abide by the stated or specific resale price maximums or minimums. This strategy prevents the resellers of a product from setting prices independently which may lead to an increase in the prices that consumers pay.
In some states, this practice is unlawful. In such countries, manufacturers and distributors are not allowed to specify prices of their products and take specific actions towards enforcing their specified price limits. States that have made the practice illegal consider it as an anti-competitive conduct.
When is resale price maintenance practiced?
This practice is exercised by manufacturers when they want to maintain a brand image within the marketplace by setting points for resale price within a specific range. Small businesses can be interested in this practice considering the fact that few or one product can have a significant impact on the success of their brands. It is basically aimed at preventing competition from non-co-operating outlets and substitute products. In the United States and Great Britain, manufacturers with few competitors and those with established brands have always resisted this practice especially when it is sponsored by combinations of several manufacturers or dealers.
This practice is also used when the manufacturer wants to prevent retailers’ free riding on the efforts of the competing retailers who opt to expend money, effort and time explaining and promoting the technical attributes and complexities of a product. For instance, a retailer might demonstrate and explain the use of a product to customers instead of reducing its price. After getting the information, the customer might opt to purchase the product from that retailer who is selling the same product at a low price without demonstrating or explaining its use.
Why some manufacturers and dealers support or oppose this practice
A common argument for those who oppose this practice has always been that specifying the range within which a product should be sold enables manufacturers and suppliers to exercise control of the market of that product. This is a type of vertical price fixing and it can prevent the reduction of wholesale and retail price through competition.
However, those who support this practice argue that it is important for manufacturers and suppliers who want to protect the image or reputation of their product while preventing its use by retailers as a form of loss leader in attracting customers. Maintaining the profit margins via this practice enables retailers to provide incentives to spend more money on a service and engage in different efforts for expanding the demand for a product such as advertising and investing in inventories. All these efforts lead to a mutual benefit for both the retailer and the supplier.
How resale price maintenance is addressed
In most countries, this practice is illegal with some exceptions or some exempted products. Most economists advocate for the adoption of a less stringent approach towards this practice or other types of vertical restraints. In countries where this practice is illegal, a corporate body or individual who engages in the practice is penalized heavily. For instance, some states penalize individuals up to $500,000 while organizations can be penalized up to $10 million or 10% of the turnover.
Nevertheless, in most countries, especially most states of the United States of America, this practice is permissible on various goods in an open and free competition with the other goods in similar, general class and there are no existing agreements between sellers at different levels with sanctions. The “safeguards” to the competition allow the basis for the argument that price raises or competition is not eliminated by fair-trade laws.
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