When wholesale prices fall short: The RPM problem revisited

Abstract

We analyze resale price maintenance (RPM) in a successive monopoly framework. When the retailer faces decreasing average costs or shelf-space opportunity costs while the manufacturer's marginal costs increase, linear pricing forces wholesale prices below marginal cost, potentially causing trade to collapse. Minimum RPM restores efficiency if trade fails, but reduces welfare if trade remains viable. Under the Colgate doctrine, the manufacturer's right to refuse to deal sustains trade even under price-floor bans. Finally, incomplete contracts induce retailer opportunism, including pocketing trade allowances without supporting the product, or exploiting inflated margins to push sales. Strategic contract combinations minimize both margins simultaneously.