Resale price maintenance (RPM), a vertical agreement between a manufacturer and a retailer that specifies a fixed minimum or maximum resale price, can be procompetitive. Minimum RPM can help a manufacturer maintain retail service quality and enhance brand reputation. Maximum RPM can limit retailer market power and improve the efficiency of franchising. Therefore, in the United States, the per se illegality of maximum RPM ended in 1997 after State Oil Company v. Khan, and that of minimum RPM ended in 2007 after Leegin v. PSKS. RPM is not per se legal in the United States, but it remains subject to a rule-of-reason analysis. Our thinking about RPM is shaped largely by the economic and legal analyses set in the United States. Examining jurisdictions featuring relatively friendlier legal treatment towards RPM can be instructive in revealing potential anticompetitive effects.
In this article, I examine how India’s treatment of maximum RPM (MRPM) as per se legal, and its violation as illegal, facilitates cartelization. Ample anecdotal evidence indicates that MRPM, introduced in India in 1990 for packaged goods to provide greater transparency in consumer prices, can facilitate collusion. Although the maximum resale price (MRP) is not necessarily the final selling price, “retailers do not compete, and MRP becomes the reference price for them to collude informally.”
Economic theory suggests that non-binding price ceilings like MRPM serve as focal points for tacit collusion. Also, in theory, prices under a system of RPM are more uniform, deviations from cartel agreements are easier to detect, collusion is easier to sustain even when wholesale prices are difficult to observe, and retailer profits are larger as retail services are allocated toward the high-priced products, excluding rivals. The Court’s opinion in Leegin echoes these theoretical concerns: “A manufacturer with market power, by comparison, might use resale price maintenance to give retailers an incentive not to sell the products of smaller rivals or new entrants.”
In this article, I suggest that in jurisdictions where MRPM is per se legal, manufacturers can compete for a retailer cartel’s patronage by selectively increasing MRP but not the price the retailers pay (price-to-retailer, or PTR). The retailer cartel can effectively collude on MRP (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 at the expense of consumer welfare and contributes to the growth of manufacturers with relatively higher retailer margins and consumer prices.
