This paper offers a new solution to an enduring puzzle in economics, that of why a manufacturer would prefer not to have its products sold by discounters. We offer a model of competitive retail pricing in the presence of demand uncertainty which demonstrates that a manufacturer may prefer to impose resale price maintenance (RPM) rather than allowing retailers to separate into niches defined by price and availability. 1 Under "niche competition," retailers must set retail prices and order inventories prior to the resolution of demand uncertainty. In equilibrium, the retail market is populated by discount retailers who offer relatively low prices with the assurance that they will sell their inventories even in low demand states, and higher price outlets that stand ready to sell in high demand states, knowing inventories will be unsold should demand be low. 2 Our model demonstrates how uniform pricing can support larger inventories and sales of the manufacturer's products, and in so doing provides a new explanation for manufacturer willingness to impose RPM. Mr. Justice Holmes' conclusion, quoted above and seemingly so at variance with economic logic, can thereby be shown to have a surprising theoretical underpinning.The need for such a theory stems from a recent reinvigoration of the resale price maintenance controversy. Throughout its long and tortuous history, RPM has attracted passionate proponents and equally committed opposition. 3 Subsequent to the Supreme Court's 1911 decision to interpret RPM as vertical price fixing, and thereby to condemn it by analogy to purely horizontal price fixing, manufacturers and their distributor allies have argued that RPM is crucial to their ability to maintain distribution, and thus to the viability of their brands. 4 1 We use the term "niches" to indicate that in equilibrium, retailers cater to different pockets of demand, each defined by its likelihood of occurrence. In our model, retailers have no monopoly power in any niche. Instead, competition in each niche occurs in Bertrand fashion. 2 Our model thus has the advantage over the existing literature that discounting arises as an equilibrium phenomenon when manufacturers are not permitted to impose uniform retail prices using resale price maintenance.3 See Overstreet (1983) for a history of the controversy. 4 The consistent thread in complaints about price cutting of branded products has been that such discounting 8 FTC rules require that the "seller should take reasonable precautions to see that the services the seller is paying for are furnished. . . ." See U.S. Federal Trade Commission, 16 CFR Part 240, Guides for Advertising Allowances and Other Merchandise Payments and Services, 55 FR 33651, August 17, 1990. Comments received by the FTC indicate that its rules were believed likely to result in RPM, an expectation that has been fulfilled. 9 MAP pricing now covers virtually all such video sales, a development that dates from an FTC policy statement that MAP would be evaluated as a rule-of-reason matter.
The public sector contracting literature has long argued that outsourced services need to be and, in fact, are subject to a more elevated level of scrutiny compared to internally delivered services. Recently, the performance measurement and management literature has suggested that the twin themes of accountability and results have altered the management landscape at all levels of government. By focusing on performance monitoring, the implication is that monitoring levels for internally provided services should more closely approximate those for contracted services. The analysis provided here yields empirical comparisons of how governments monitor the same service provided in‐house and contracted out. We find evidence that services provided internally by a government’s own employees are indeed monitored intensively by the contracting government, with levels of monitoring nearly as high as those for services contracted out to for‐profit providers. In contrast, however, we find strong evidence that performance monitoring by the contracting government does not extend to nonprofit and other governmental service providers, each of which is monitored much less intensively than when comparable services are provided internally. For such service providers, it appears that monitoring is either outsourced along with services, or simply reduced.
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