A theoretical analysis of resale price maintenance

Resale Price Maintenance has been defended as a tool to prevent free riding among retailers and condemned as a tool to protect price fixing schemes. This paper presents an economic model in which customers search for products from among those provided by manufacturers and competitive dealers who provide, at a cost, information useful in the customers' search. It is shown that competitive manufacturers will not maintain the resale price above the competitive dealer equilibrium but that the monopolist manufacturer will under certain elasticity conditions. Thus resale price maintenance is a sufficient but not necessary condition of monopoly.     

Selling an asset to a competitor

A seller decides whether to allocate an item among two potential buyers. The seller and buyer 1 interact ex post in such a way that each of them suffers a negative externality if the other possesses the item. We show that the optimal allocation rule favors buyer 2, who does not interact ex post with the seller, and in particular bidder 1 may not obtain the good even if his valuation is highest. The auction is therefore subject to resale. When resale is possible, the seller must distort the original auction. We show that the mechanism depends crucially on the way resale is organized ex post. The seller may decide to always allocate the good to the agent with the highest valuation when rents are fully extracted by an intermediary on the resale market. However, she may resort to a stochastic mechanism when the winner of the primary auction has full bargaining power in the resale stage.     

Optimal mechanism design with resale via bargaining

In this paper, we examine the optimal mechanism design of selling an indivisible object to one regular buyer and one publicly known buyer, where inter-buyer resale cannot be prohibited. The resale market is modeled as a stochastic ultimatum bargaining game between the two buyers. We fully characterize an optimal mechanism under general conditions. Surprisingly, in this optimal mechanism, the seller never allocates the object to the regular buyer regardless of his bargaining power in the resale market. The seller sells only to the publicly known buyer, and reveals no additional information to the resale market. The possibility of resale causes the seller to sometimes hold back the object, which under our setup is never optimal if resale is prohibited. We find that the seller?s revenue is increasing in the publicly known buyer?s bargaining power in the resale market. When the publicly known buyer has full bargaining power, Myerson?s optimal revenue is achieved; when the publicly known buyer has no bargaining power, a conditionally efficient mechanism prevails.     

Making Britain More Competitive: A Critique of Regulation and Competition policy

The paper provides a critique of the Labour government's attempts to make Britain more competitive by reforming regulation and competition policy. It is argued that the Utilities Act (2000) has not reduced the cost of capital, but rather the discretionary powers of the regulators have been generalised further, augmented by government guidelines covering additional social and environmental objectives. The paper reviews the impact of the windfall tax, the use of private balance sheets as a private–sector borrowing requirement, and the growing costs of regulation. The Competition Act (1998) has concentrated on conduct rather than structure, and the paper argues that the neglect of structural change to create competition, rather than merely sustain it, reduces the scope for enhancing productivity and hence the competitive position of the economy.     

Auctions with private uncertainty and resale opportunities

When an auction is followed by an opportunity for resale, bidder valuations are endogenously determined, reflecting anticipated profit from buying/selling in the resale market. These valuations vary with the resale market structure, can differ across auction types, and may be lower or higher than if resale were impossible. Although resale introduces a common value element to the model, revenue equivalence can hold; when it fails, this is due not to affiliation but to differences in information conveyed to the secondary market. Information linkages between markets can also lead to signaling and, in some cases, preclude separation in the auction.     

ON THE PROFITABILITY OF RESALE PRICE MAINTENANCE WHEN DEMAND IS UNCERTAIN

A previous study finds that in a market where a manufacturer faces uncertain demand and sells to consumers through competitive retailers, the manufacture wishes to support adequate retail inventories by imposing resale price maintenance (RPM). I show that if retail inventories are allocated to consumers through first‐come‐first‐served rule rather than efficient rationing rule in the game with unconstrained retail competition, imposing RPM may not be profitable. It may not encourage more retail inventories either. RPM may also lower consumer surpluses and social welfare. This study casts some doubt on the demand uncertainty theory that supports RPM.     

Asymmetric auctions with resale: An experimental study

We study auctions with resale based on Hafalir and Krishna's (2008) [6] model. As predicted, weak bidders bid more with resale than without, so that average auction prices tend to increase. When the equilibrium calls for weak types to bid higher than their values with resale they do, but not nearly as much as the theory predicts. In other treatments outcomes are much closer to the risk neutral Nash model's predictions. Bid distributions for weak and strong types are more similar with resale than without, in line with the theory.     

Level of access and infrastructure investment in network industries

In this paper, we study how the terms of access to an incumbent’s infrastructure (i.e., the level of access and price) affect an entrant’s incentives to build its own infrastructure. Setting a high level of access (e.g., a resale arrangement), which requires relatively small up-front investment for entry, accelerates market entry, but at the same time delays the deployment of the entrant’s infrastructure. This is also true for a lower access price. We show that the socially optimal access price can vary non-monotonically with the level of access. We also study the case where access is provided at two different levels, and show that access provision at multiple levels can delay infrastructure building. Finally, we modify our baseline model to allow for experience and/or market share acquisition via access-based entry, and show that high levels of access may accelerate facility-based entry.     

The Economic Logic for Conditioning Bell Entry into Long Distance on the Prior Opening of Local Markets

One of the most important and most contentious issues for regulation and competition raised by the 1996 Telecommunications Act is when to authorize the regional Bell companies to offer long-distance services. The Department of Justice (DOJ) adopted a standard requiring that a Bells local market must first be irreversibly open to competition. This paper analyzes the competitive benefits and costs of authorizing Bell entry, explains the DOJs standard, and argues that the incentives created by this standard will help achieve the Acts competitive goals more efficiently and rapidly than other standards, ultimately reducing the need for intrusive regulation.     

Paragons of virtue? Competitor entry and the strategies of incumbents in the U.S. local telecommunications industry

We investigate whether the presence of new competitors has influenced the behaviour of U.S. incumbent local exchange carriers (ILECs) with respect to pricing, advertising and the extent of diversification that they engage in. This issue is explored empirically, using data for the major local exchange carriers for the years 1994 to 1998. The period straddles periods of both absence and presence of competition in the industry, since the Telecommunications Act of 1996 has opened hitherto closed markets to competitive local exchange carriers (CLECs). While a recent Federal Communications Commission (FCC) report on local competition documents vigorous entry during the past years, the market share of the entrants is insubstantial. Our results indicate that the threat provided by market entrants has notably influenced the strategic behaviour of ILECs. The findings show that the incumbent U.S. local operators, particularly the larger ILECs, aggressively protect their profit streams from traditional business. The evidence demonstrates that the ILECs have responded to the Telecommunications Act 1996, and to the threat of market entry it has created, through entry deterrence. This strategic behaviour has been successful in providing ILECs with protection of their monopolistic markets so far.     

English auctions with resale: An experimental study

I design and test a simple English auction and two English auctions with resale, but with different informational backgrounds. All three treatments theoretically have the same equilibrium. I find, however, that the possibility of resale alters behavior significantly. In the two treatments with resale, subjects deviated from both the Nash prediction and the common results about bidding behavior in English auctions. Subjects tend to overbid, when they are certain they can reap the whole surplus in the resale market. I employ different models like QRE and levels of reasoning and conclude that overbidding can be explained as a rational response to the noisy environment in markets with human participants, that is, as rational decision making when anticipating others to make errors. When the outcome of the resale market is not certain, there is significant signaling behavior and auction prices tend to be lower than the Nash prediction.     

Constitutional choice for the control of water pollution

Before passage of the Clean Water Act, water pollution was controlled by the common law of nuisance and the law of water rights. Had the common law not been superseded, it might have provided more ecologically sound pollution control than has occurred under the command-and-control statutory regime. The Clean Water Act imposes mechanical definitions and is subject to political interference. In contrast, the principle of the common law lies in its evolutionary and competitive nature, which is consistent with the market process. Meiners thanks the Political Economy Research Center of Bozeman, Montana for support during his visit in 1992. We thank Terry Anderson, Robert Natelson, Jane Shaw and Richard Stroup for helpful comments. We owe a large intellectual debt to Bob Staaf, who made us think about the relationship between competitive markets and the common law.     

Floor-level premiums in private housing: the case of condominiums in Singapore

Using a sample consists of 3367 actual condominium sales transacted in resale market from May 2012 to April 2015 from the Singapore Urban and Redevelopment Authority, a hedonic pricing model is used to investigate for the presence of floor-level premiums in the private housing market, condominium, in District 23 of Singapore. Unit size, types of land tenure and the distance to the nearest mass rapid transit (MRT) station are also used as other independent variables. The estimated coefficient of each of these independent variables is statistically significant. Each of these independent variables also has positive estimated coefficient, suggesting that they have positive effects on condominium resale prices. Main findings are (a) there is a presence of floor-level premium; (b) the condominiums with a distance more than 400 m to the MRT station get higher resale prices; and (c) there is an increasing effect of floor level on condominium price.     

First-price auctions with resale: the case of many bidders

We study first-price auctions with resale when there are many bidders and derive existence and characterization results under the assumption that the winner of the initial auction runs a second-price auction with an optimal reserve price. The fact that symmetrization fails when there are more than two bidders has been observed before, but we also provide the direction: weaker bidders are less likely to win than stronger ones. For a special class of distributions and three bidders, we prove that the bid distributions are more symmetric with resale than without. Numerical simulations suggest that the more bidders there are, the more similar the allocation is to the case without resale, and thus, the more asymmetric the bid distributions are between strong and weak bidders. We also show in an example that the revenue advantage of first-price auctions over second-price auctions is positive, but decreasing in the number of bidders.     

On the Efficiency of Decentralized Exchange with Resale Possibilities

This paper studies decentralized exchange by bilateral matching and bargaining when resale is possible. Decentralized exchange involves the risk that goods and services may be allocated inefficiently; if low-valuation buyers consume while high-valuation buyers do not, then social welfare is reduced. If resale is possible and transaction costs are negligible, we would nevertheless expect an efficient allocation to result from decentralized exchange. This paper suggests that this depends on the nature of the commodity; while the allocation of a durable good will be efficient, the allocation of a "consumable" good need not.     

COMMENTS ON MARVEL: HOW FAIR IS FAIR TRADE?

Each of the papers in this symposium concludes with policy recommendations regarding the legality of resale price maintenance (RPM). The legal standard used to judge RPM affects the entire universe of manufacturer control over resale prices. Therefore, policy recommendations are valid only to the extent that the proffered economic theory applies to a substantial portion of that universe. My comments focus primarily on how much of the RPM universe is addressed by Marvel's (1985) explanations in “How Fair is Fair Trade?” If an economic theory, no matter how interesting academically, describes only a small minority of RPM instances, it should not form the basis for public policy.     

Welfare effects of competitive lobbying efforts in international oligopoly markets

Conventionally, rent-seeking activities have been considered to deteriorate social welfare and to distort resource allocation. This paper examines whether rent-seeking behavior can improve social welfare by focusing on the welfare effects of firms’ competitive lobbying efforts when governments can impose market entry regulation against foreign firms. We demonstrate that competitive lobbying efforts can improve social welfare when such lobbying efforts are directed to reduce market entry barriers. In addition, social welfare can be maximized when the government shows the maximum sensitivity to the foreign firm's political contributions while maintaining competitive market structure. Moreover, it is shown that the dominant strategy for a domestic firm is to allocate more resources to R&D sectors while it is optimal for foreign firms is to exert more efforts in lobbying to reduce the market entry barriers when a government makes political economic approach in market entry regulations.     

RESALE PRICE MAINTENANCE AND ANTITRUST POLICY

Some scholars would legalize all purely vertical resale price maintenance (RPM). They acknowledge that RPM can harm consumers when it facilitates horizontal collusion among manufacturers or dealers. But when RPM is purely vertical (i.e., when it is imposed by a manufacturer acting independently), they argue that it must be procompetitive. Recent theoretical research has shown, however, that purely vertical RPM can reduce economic efficiency. This result occurs when the higher prices and dealer services induced by RPM benefit marginal consumers but substantially reduce the welfare of intramarginal consumers, who would have preferred the product without the services at a lower price. Since these circumstances are empirically plausible, a rule of per se legality may not be appropriate. At the same time, evaluating RPM under the rule of reason might not be workable. Anticompetitive instances of the type described could be difficult to prove. These research findings, therefore, are most consistent with a rule of per se illegality for RPM, with exceptions for situations in which RPM is most likely to be pro-competitive (e.g., new entry).     

Pricing,distribution and the supply of storage

The Belgian nitrogen fertilizer cartel announces each year a price schedule which is enforced during the coming twelve months. These prices are resale prices to final users and reflect changes in costs of storage. A game-theoretic model is set up to rationalize this behavior for the case of instantaneous final demands and a large number of distributors. Habit formation in final demand is then shown to lead to even more flexible prices, while transferability over time is seen to favor more rigid prices. It is finally suggested that vertical integration into a competitive distribution sector can be profitable because it restores the possibility of intertemporal price discrimination.