Working Paper: CEPR ID: DP13639
Authors: Roman Inderst; Sebastian Pfeil
Abstract: We show how a brand manufacturerís control over retail prices can lead to e¢ cien-cies when consumers rely on prices as a signal of quality. For this we first show how higher prices can be associated with both higher quality perception as well as higher actual quality. We next identify a conflict of interest between retailers and manufactures. Retailers do not internalize the ensuing reputation spill-over that higher prices have on demand at all outlets. And they have less incentives to support brand image through higher prices as this erodes their own position in negotiations while increasing that of the manufacturer. Our efficiency defence for RPM thus applies even when retailers need not be incentivized to undertake non-contractible activities, as in our model the key opportunism problem, with respect to quality provision, lies between the manufacturer and consumers.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher prices (D49) | higher perceived quality (L15) |
| higher prices (D49) | higher actual quality (L15) |
| higher prices (D49) | conflict of interest between manufacturers and retailers (L14) |
| manufacturers control retail prices (L11) | higher equilibrium quality (L15) |
| manufacturers control retail prices (L11) | efficiency gains from RPM (H21) |
| conflict of interest affects price setting (L11) | manufacturers prefer higher retail prices (L11) |
| conflict of interest affects price setting (L11) | retailers opt for lower prices (L81) |