What is resale price maintenance and why would a manufacturer want to use it? Under what circumstances would resale price maintenance increase social gain?

Question

What will be an ideal response?

Answer 1

When a manufacturer uses resale price maintenance, it sets a retail price for its product and forbids retailers to undercut that price. One reason that a manufacturer would want to use resale price maintenance is to guarantee that retailers offer quality services (e.g., showrooms and knowledgeable sales forces) to customers. If retailers competed by means of price, such services would not be offered-customers would gather information from stores that offered services but ultimately buy from retailers who offered no services and cut-rate prices. Resale price maintenance prevents price competition among retailers and forces them to compete in other ways. In particular, retailers will spend the difference between the wholesale and retail prices of the product on providing services that attract customers. As long as the value consumers place on these services is greater than their cost, the equilibrium quantity will rise and social gain will increase (with the gains split between the manufacturer and the consumers).