Resale price maintenance contracts with retailer sales effort: Effect of flexibility and competition

Haresh Gurnani, Yi Xu

Research output: Contribution to journalArticlepeer-review

30 Scopus citations

Abstract

In Resale Price Maintenance (RPM) contracts, the manufacturer specifies the resale price that retailers must charge to consumers. We study the role of using a RPM contract in a market where demand is influenced by retailer sales effort. First, it is well known that RPM alone does not provide incentive for the retailer to use adequate sales effort and some form of quantity fixing may be needed to achieve channel coordination. However, when the market potential of the product is uncertain, RPM with quantity fixing is a rigid contract form. We propose and study a variety of RPM contracts with quantity fixing that offer different forms of flexibility including pricing flexibility and quantity flexibility. Second, we address a long-time debate in both academia and practice on whether RPM is anti-competitive in a market when two retailers compete on both price and sales effort. We show that depending on the relative intensity of price competition and sales effort competition, RPM may lead to higher or lower retail prices compared to a two-part tariff contract, which specifies a wholesale price and a fixed fee. Further, the impact of RPM on price competition and sales effort competition is always opposite to each other.

Original languageEnglish (US)
Pages (from-to)448-463
Number of pages16
JournalNaval Research Logistics
Volume53
Issue number5
DOIs
StatePublished - Aug 1 2006

Keywords

  • Flexible pricing
  • Flexible quantity
  • Resale price maintenance
  • Retail competition
  • Sales effort
  • Supply contracts

ASJC Scopus subject areas

  • Modeling and Simulation
  • Ocean Engineering
  • Management Science and Operations Research

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