DEMAND UNCERTAINTY AND RESALE PRICE MAINTENANCE

When retailers must commit to shipment quantities prior to resolution of demand uncertainty, manufacturer stipulation of a minimum retail price is likely to be profitable for the manufacturer and not damaging to the retailers. The reason is simple: if demand turns out to be low, the unfettered market-clearing price can lie below the price that maximizes total sales revenue. A minimum retail price that is binding in the low-demand state can thus increase total revenue even though it saddles retailers with unsold merchandise. The ubiquity of full reimbursement for returns in Japan, even though it is in theory merely a second-best way of achieving minimum retail price stipulations, reveals important aspects of manufacturer maintenance of retail prices having to do with enforcement problems, the allocation of risk-bearing, and economic incentives. These aspects of resale price maintenance (RPM) are relevant to the normative evaluation of the special exemptions for RPM that Japan's Fair Trade Commission has long maintained but is now phasing out.     

MANUFACTURER ACCEPTANCE OF RETURNS*

Modelling the retailers' behaviour explicitly, I extend the model of manufacturer returns policy of Flath and Nariu (1989) by introducing general demand conditions under uncertainty. I derive an equivalence theorem between manufacturer acceptance of returns and resale price maintenance (RPM) under conditions of zero marginal cost, risk neutrality and symmetric information. This was first shown by Marvel and Reagan (1986) in a somewhat different context. I also discuss some differences between RPM and return policy under asymmetric information and risk attitudes.