Wednesday, April 18, 2012

Resale Price Maintenance in e-books

The New York Times reports that Amazon, a book retailer, will change it's e-book prices in agreement with Macmillan, a book publisher, by raising the price of e-book's to meet Macmillan's price demand. This is an excellent example of resale price maintenance (supplier controlled pricing). Under resale price maintenance, the manufacturer (Macmillan) sets a minimum price at which the retailer (Amazon) must sell its product.

Some may view resale price maintenance as anti-competitive since it prevents retailers from competing on price. But there are some reasonable arguments for resale price maintenance. If the manufacturer has market power (i.e. the ability to set prices above marginal cost), they could do this on the wholesale price rather than the resale price. Another is that the resale price minimum for all retailers allows retailers who provide pre-sales services (which will be a cost to the retailer) an incentive to keep providing this "public good" and reduces the incentive for customers to free-ride on those pre-sales services at one retailer and purchase the good at a lower price at a retailer that does not offer those pre-sales services.

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