Maximum Resale Price Maintenance and Retailer Cartle Profits: Evidence from the Indian Pharmaceutical Industry
In jurisdictions where maximum resale price maintenance (MRPM) is per se legal, manufacturers can compete for a retailer cartel’s patronage by selectively increasing the maximum resale price consumers pay but not the price the retailer cartel pays. The retailer cartel can effectively collude on maximum resale price, which serves as a focal point, allocate market shares among manufacturers based on the retail margins they receive, and, as a punishment, boycott manufacturers offering low margins. In such a setup, MRPM raises retailer profits and undermines consumer welfare by promoting the growth of manufacturers with relatively higher margins. Using data on the pricing of pharmaceuticals in India, we test these predictions and find consistent evidence. Overall, our results indicate that vertical price restraints such as MRPM, although considered welfare enhancing and per se not illegal under US jurisprudence, can sometimes facilitate horizontal collusion among manufacturers and/or retailers.