Resale price maintenance under asymmetric information

Abstract

We study Resale Price Maintenance (RPM) and quantity fixing arrangements (QF) in a framework with successive monopolies under both adverse selection and moral hazard. The analysis compares the private and the welfare properties of both contractual modes. Under asymmetric information, both kinds of vertical contracts entail a double marginalization driven by the information rents distributed to a privately informed downstream retailer. This forces the upstream producer to sell above his marginal costs. The upstream producer always prefers RPM to QF, but the impact of RPM on consumers' surplus is ambiguous. Whenever RPM is the preferred contracting mode for the vertical structure from an ex ante viewpoint, it also raises consumers' surplus, thereby producing a Pareto improvement relative to QF contracts.