Resale Price Maintenance and Informative Advertisement

Abstract

This paper studies a monopolistic producer's resale price maintenance scheme when downstream retailers simultaneously put (informative) advertisement efforts and sell final products. It posits that each retailer's advertisement effort increases not only its own sales, but also the entire market size, because consumers, after observing an advertisement from one retailer, may purchase from another. We demonstrate that unless the advertisement cost is too elastic, the minimum resale price maintenance scheme is binding and welfare-enhancing. In contrast to existing literature, it supports the legal doctrine of rule of reason rather than illegal per se even under consumer surplus standard for competition policy.