RESALE PRICE MAINTENANCE (RPM)

Agreements or concerted Practices between a supplier and a dealer with the object of directly or
indirectly establishing a fixed or minimum price or price level to be observed by the dealer when
reselling a product/service to his customers. A provision which foresees resale price maintenance
will generally be considered to constitute a hard core restriction. In the case of contractual
provisions or concerted practices that directly establish the resale price, the restriction is clear
cut. However, resale price maintenance can also be achieved through indirect means: for
example by fixing the distribution margin or the maximum level of discount the distributor may
grant from a prescribed price level, by making the supplier’s rebates or his reimbursement of
promotional costs subject to the observance of a given price level, by linking the prescribed
resale price to the resale prices of competitors, or by threats, warnings, or even sanctions against
a dealer who does not respect a certain price level (such as penalties, delay or suspension of
deliveries or termination of contracts).

A supplier specifying the minimum (or maximum) price at which the product must be re-sold to
customers. From a competition policy viewpoint, specifying the minimum price is of concern. It
has been argued that through price maintenance, a supplier can exercise some control over the
product market. This form of vertical price fixing may prevent the margin from retail and
wholesale prices from being reduced by competition. However, an alternative argument is that
the supplier may wish to protect the reputation or image of the product and prevent it from being
used by retailers as a loss leader to attract customers. Also, by maintaining profit margins
through RPM, the retailer may be provided with incentives to spend greater outlays on service,
invest in inventories, advertise and engage in other efforts to expand product demand to the
mutual benefit of both the supplier and the retailer. RPM may also be used to prevent free riding
by retailers on the efforts of other competing retailers who instead of offering lower prices
expend time, money and effort promoting and explaining the technical complexities or attributes
of the product. For example, one retailer may not reduce price but explain and demonstrate to
customers the use of a complex product such as a computer. The customer may after acquiring
this information choose to buy the computer from a retailer that sells it at a lower price and does
not explain or demonstrate its uses. In many countries, RPM is per se illegal with few exceptions
or exempt products. Many economists now advocate adopting a less stringent approach in
competition law towards RPM and other vertical restraints.

Evolution

The initial movement for resale price maintenance in the 1880s reflected the success of brand
promotion and the resulting increase in competition among retailers. American manufacturers
were granted more specific authority than was the case in other parts of the world; the so-called
nonsigners’ clause in state fair-trade laws made the contractual prices agreed upon between a
manufacturer and contracting dealers binding upon all resellers. (See fair-trade law.)

Resale price maintenance as a business practice was weakened during the post-World War II
years. It was prohibited in both Canada and Sweden and strongly attacked in France. Of the 44
states in the United States that had fair-trade laws with effective nonsigner provisions during the
1930s, fewer than half still retained those laws 30 years later, and in 1975 fair-trade laws were
repealed altogether by an act of Congress. In Great Britain, a governmental committee
recommended strongly against collective sanctions and enforcement of resale price maintenance
agreements, in sharp contrast to earlier governmental investigations of the subject. In 1956 Great
Britain enacted the Restrictive Trade Practices Act, and in 1964 resale price maintenance was
made illegal by an act of Parliament, excepting a few products, such as books.

Resale price maintenance by manufacturers was weakened when large-scale retailing, together
with the growth of strong dealer organizations, set up conflicting interests within the retailing
field. Because marketing channels in highly industrialized countries are complex and
overlapping, the establishment and enforcement of a single price or even a minimum price by
manufacturers is a complicated and burdensome task in the absence of collective enforcement
efforts, limitation of numbers of enterprises, or governmental intervention. Because effective
resale price controls attract excessive capital and manpower into distribution activities by
eliminating price competition, such a program logically requires some means of restricting the
numbers of enterprises.

Although fair-trade laws prevent well-known brands from being used as “bait” to attract
customers to buy other brands pushed by distributors, it is generally agreed that resale price
maintenance or “fair trade” is not a true solution to problems arising out of trade conflicts or
unfair and deceptive selling practices.

Advantages & Disadvantages of Resale Price Maintenance

Advantages

1: Image Stability

Manufacturers that are concerned with maintaining a strong reputation for quality or durability
with end customers may use minimum resale price contracts to prevent distributors from
discounting products to their customers. When prices are discounted by wholesalers and retailers,
the end customer may ultimately purchase the product at a price point that undermines the
quality perception intended by the manufacturer. This can ultimately create repercussions
because if consumers associate the lower price with lesser quality, retailers and distributors are
less willing to pay well to acquire the product.

2: Volume

In other situations, manufacturers prefer to maintain a high-value or low-cost orientation for

products in the consumer marketplace. In this case, they may set a maximum resale price to
prevent distributors from overpricing the products as they move through the rest of the
distribution channel. If consumers are overcharged and do not find the product's benefits to have
significant value, a general sense of negativity toward the manufacturer's products can emerge.

Disadvantages

1: Anti-Competitive

Interestingly, the legal perspective on resale price maintenance contracts has changed as of 2007,
following 96 years of legal restriction based on the 1911 Sherman Act. The Supreme Court held
at that time that such contracts were anti-competitive and went against the free-enterprise system
by inhibiting the ability of the marketplace to influence prices. However, in 2007 the "Leegin
Creative Leather Prods. v. PSKS, Inc." case resulted in a judgment that resale price maintenance
was not illegal but each situation would be subject to the "Rule of Reason," according to Arent
Fox. Thus, the legal consideration is whether the merits of the contract outweigh the competitive
drawbacks.

2: Inflexibility

More practically, resale price maintenance contracts limit the flexibility of the reseller to adjust
prices to market demand. If it has excess inventory and demand is waning, a contract may
prevent a reduction in price that would allow for the quick sale of the excess inventory. On the
contrary, if demand drastically increases, a maximum price contract can limit the reseller's ability
to optimize profit margins while the product is hot.