Media Briefings

RESALE PRICE MAINTENANCE: New evidence of why firms do it and what makes them stop

  • Published Date: November 2013

Manufacturers reported to the UK’s Office of Fair Trading (OFT) for imposing a minimum resale price on their products are more likely to become compliant when the complaint arises from an online business, when it comes from a wholesaler rather than a retailer, and when similar complaints had already been lodged against them.

These are the central findings of research by Professors Emanuele Giovannetti and Laura Magazzini, published in the November 2013 issue of the Economic Journal. Their study analyses complaints about resale price maintenance (RPM) received by the OFT between 2007 and 2009. These are typically made by ‘downstream’ retail firms about the price-setting demands of ‘upstream’ manufacturers.

On receiving a complaint about the breach of competition law that RPM represents, the OFT’s enforcement practice was to send a warning letter, asking the firm to desist. The researchers record whether a reply was received, whether it confirmed compliance and any other justification for having adopted RPM. Integrating these data with additional information about the markets and firms involved, they derive several conclusions that help to understand the main causes and effects of RPM:

· The upstream market shares of the reported firms are well below the level at which any market power might be inferred. Hence, observed RPM is not due to upstream firms exploiting their individual market power.

· Around 70% of the complaints relate to markets with a multiplicity of complaints, raising the possibility of collusion arising from the widespread use of RPM.

· The data are consistent with a view that much of RPM is focused on limiting price-cutting in an online environment.

· Over 30% of the firms that received warning letters responded to explain that they had engaged in RPM to protect their brand or to overcome ‘free-riding’ (especially around customer support). This fits well with some of the economic efficiency rationales for RPM proposed in theoretical analysis.

· Over 20% of firms that received warning letters stated that they had imposed RPM following complaints from other downstream firms. This is consistent with a picture of RPM instigated by downstream firms with buyer power.

To assess the efficacy of the adopted enforcement policy, the authors study the main factors driving the firms to comply with the request to terminate RPM. The findings show that wholesalers and purely online businesses are more likely to benefit from the OFT action than retailers and ‘bricks and mortar’ businesses. They also show that recidivist manufacturers – those that have been warned before about imposing RPM – are more likely to comply with the law.

The researchers note that different theories explain why producers may want to impose RPM: some focus on the harm that RPM causes for consumers by preventing price competition; others explain how RPM may increase the risk of collusion. But RPM may also have beneficial effects by protecting against free-riding.

The difficulties in assessing the costs and benefits of RPM for society as a whole are reflected in a century-long legal debate. In 1911, for example, the US Supreme Court found RPM to be per se illegal irrespective of the economic facts of the case (Dr. Miles Medical Co. v. John D. Park & Sons Co) while in 2007 it concluded that RPM should be judged on a case-by-case assessment, based on its real effects (‘Leegin Creative Leather Products Inc. v. PSKS Inc’) .

European competition law views RPM as a ‘hardcore’ infringement – Article 101(1) – and different enforcement policies will affect firms and consumers, depending on the specific effects of RPM in the context where it takes place.

The results of this new study show that the impact on both business and consumers of the legal treatment of RPM, and the related enforcement policies, can only be assessed through an empirical investigation of the costs and benefits of RPM in relation to a firm’s specific environment. That environment also drives the likely compliance of a firm with the law.

ENDS

Notes for editors: ‘Resale Price Maintenance: An Empirical Analysis of UK Firms’ Compliance’ by Emanuele Giovannetti and Laura Magazzini is published in the November 2013 issue of the Economic Journal.

Emanuele Giovannetti is Professor of Economics at the Institute for International Management Practice, Anglia Ruskin University, Cambridge.

Laura Magazzini is Assistant Professor of Econometrics at the University of Verona, Department of Economics.

For further information: contact Emanuele Giovannetti on 0845 196 2233 (UK callers) or +44 1245 493131 ext. 2233 (international callers) (email: emanuele.giovannetti@anglia.ac.uk); Laura Magazzini via email: laura.magazzini@univr.it; Institute for International Management Practice (LAIBS) Media Contact Michelle Wackett via email: michelle.wackett@anglia.ac.uk; or Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh).