Do Recommended Retail Prices Really Benefit Consumers? The Role of Buyer Power

We consider vertical price restrictions like Recommended Retail Prices (RRP) and Resale Price Maintenance (RPM), together with a retailer’s unit discount when purchasing the good from the manufacturer. We study how retailer’s buyer power affects the nature of the vertical price restriction occurring in equilibrium. A bit unexpectedly, it emerges that buyer power has got a non—monotonic relation with welfare: when it is either small or very large, welfare is at its lowest level. When buyer power is at an intermediate level, society is better off. The following trade—off explains these results: on the one hand, RPM eliminates double marginalization; on the other hand, to convince the retailer to accept it, a higher unit discount must be given. Our analysis suggests that antitrust authorities should take buyer power into account when assessing welfare effects of vertical price restrictions, and should be open to deal with its non—monotonic relation with welfare.