Resale price maintenance for supply chains distributing products with demand uncertainty

This paper explores the economic roles of resale price maintenance (RPM) in supply chains for a specific product, when consumers have taste heterogeneity and the manufacturer faces demand uncertainty. Two transaction schemes within supply chains are compared: (1) RPM, and (2) decentralized pricing in a competitive market environment. With decentralized pricing, a manufacturer loses the incentive to produce a product in categories where the probability that the manufacturer fails to design the product as suitable to public tastes of consumers is high. However, RPM resolves the problem and induces the manufacturer to supply the good, bringing positive surplus to consumers.