Question

Acme Computer Co. sells computers to retail stores for $400. If Acme requires the retailers to charge customers $500 for the computers, then it is engaging in

	a.	monopolistic competition.
	b.	tying.
	c.	predatory pricing.
	d.	resale price maintenance.

Answer 1

Acme Computer Co. sells computers to retail stores for $400. If Acme requires the retailers to charge customers $500 for the computers, then it is engaging in resale price maintenance. Resale price maintenance involves agreements between manufacturers and downstream distributors that set the downstream price of the product, either at a minimum price or a maximum price.A resale price maintenance (RPM) agreement is a contract in which a manufacturer and a downstream distributor (retailer) agree to a minimum or maximum price the retailer will charge its customers (consumers). One might wonder why a manufacturer, having sold a product to retailers, would want to exert any influence over resale prices. It might seem, at first glance, that the manufacturer would want price competition among its retailers to keep markups to a minimum and so promote demand for the manufacturer’s product.

Manufacturers selling undifferentiated products in perfectly competitive markets would never use RPM as a pricing practice. In such markets, manufacturers have no unilateral influence over prices at either wholesale or retail levels. But in many transactions involving differentiated products, including name brands, RPM can have a constructive role. To understand why, two economic concepts must be understood: (1) consumer demand for a differentiated product can depend on retail “service” as well as the product’s price, and (2) retail service can be an occasion for what economic theory calls “market failure.”