CAN RESALE PRICE MAINTENANCE AND FRANCHISE FEES CORRECT SUBOPTIMAL LEVELS OF RETAIL SERVICE

This paper examines resale price maintenance by a monopoly manufacturer who sells its product through monopolistically competitive retailers. The retailers also provide service, but there is an externality in its provision. If the manufacturer sets only a wholesale price, the externality results in too little service, and the addition of RPM will not correct this. Maximum RPM is used only to correct the successive monopoly problem with no effect on service. However, if the manufacturer can also set a franchise fee, too little service arises when the externality is large. Minimum RPM will correct this, increasing both profits and consumer surplus. This partially confirms the Telser (1960) argument for RPM. When the externality is small, retailers provide too much service, and the 'vertical externality' argument is invalid. These results suggest that the insights from simple vertical models may not generalize to models which allow other dimensions of non-price competition among retailers. © 1990.