Endogenous RPM and the Role of Buyer Power

This paper investigates whether, and under which conditions, in a vertically separated structure it would be preferable to guarantee the retailer the ability of setting retail prices or rather, to give it to the manufacturer, by allowing RPM. This issue has been crucial in important antitrust disputes on vertical price fixing. We focus on the role of buyer power on the equilibrium retail price regime. While it has usually been believed that RPM can occur more easily when manufacturer’s power is the highest, our analysis shows that RPM occurs endogenously when the negotiation power is close to be balanced between manufacturers and retailers. Only in this case the manufacturer is willing to propose RPM and the retailer is willing to accept it. The Galbraith conjecture is at work, given that welfare increases when maximum RPM is enforced. These results hold not only with monopoly but also with oligopoly.