Transcript resale price maintenance (RPM)

Special Selling
MC
PR
Pw
This dealer
provides services
AC
Providing
services
The retail
(explaining
PR
price with
the product,
expensive
selling it, and
retailing
servicing
customers)
costs money.
Lectures in Microeconomics-Charles W. Upton
The Better Mousetrap
• You have built a better mousetrap.
• Rather than wait for the world to beat a path
to your door, you will take the product to
the world via retailers.
Special Selling
The Basics of Retailing
If you sell
the product
for $18,
competition
amongst
retailers will
mean a retail
price of $25
$25
$18
Special Selling
The Basics of Retailing
$25
$18
Set the wholesale price;
let competition among
retailers keep the markup low.
Special Selling
Resale Price Maintenance
• Sometimes the manufacturer imposes
resale price maintenance (RPM) ,
setting a minimum retail price for the
product.
Special Selling
Resale Price Maintenance
• Sometimes the manufacturer imposes
resale price maintenance (RPM) ,
setting a minimum retail price for the
product.
• While Wal-Mart does not like RPM, it
serves a useful purpose.
Special Selling
The Role of Special Selling
• You have the
problem of
providing
advertising for your
product.
Special Selling
The Role of Special Selling
• You have the
problem of
providing
advertising for your
product.
Special Selling
Shifting the Demand Curve
• You have the
problem of
providing
advertising for your
product.
• You could do it
through mass media
advertising
Special Selling
Shifting the Demand Curve
• You have the
problem
For of
many products this
providing
is the cheapest way of
advertisingproviding
for your the
product. advertising.
• You could do it
through mass media
advertising
Special Selling
Shifting the Demand Curve
• You have the
problem
For of
many products this
It explains the major
providing
is the cheapest way of
declines of many
advertisingproviding
for your
the
traditional forms of
product. advertising.
retailing.
• You could do it
through mass media
advertising
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But How?
• Expensive retailing
and mass marketing
shift the demand
curve.
• If mass marketing
is cheaper, push
your product via
Wal-Mart.
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Free Riders
• In other cases, a free rider problem can
emerge.
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Free Riders
• In other cases, a free rider problem can
emerge.
• Suppose you have a demand curve that
depends on dealer efforts.
Special Selling
Free Riders
• In other cases, a free rider problem can
emerge.
• Suppose you have a demand curve that
depends on dealer efforts.
• Be careful to avoid free riders; that is,
having the product sold at a high service
store and then sold for a lower price at a noservice store.
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The Dilemma
• You do not control dealers, but allows
anyone to retail and to set marketing
strategy.
Special Selling
The Dilemma
• You do not control dealers, but allows
anyone to retail and to set marketing
strategy.
• They have two choices
– A Service Rich Strategy
– A Service Lean Strategy
Special Selling
The Retailer’s MC Curve
If the retailer
does nothing
Pw
Pr
Special Selling
The Retailer’s MC Curve
Pw
If the retailer
does nothing
Obviously he
must do
something and
that costs
money.
Special Selling
If Services are Provided
MC
AC
PR
PR
Pw
This dealer
provides services
Special Selling
Providing
services
(explaining
the product,
selling it, and
servicing
customers)
costs money.
Many Retail Services
MC
PR
Pw
This dealer
provides services
AC
Providing
services
The retail
(explaining
PR
price with
the product,
expensive
selling it, and
retailing
servicing
customers)
costs
money.
Special Selling
Selling Strategies
MC
If we cut the
PR services
retailing costs
and the retailing
Pw price drops.
This dealer
provides services
AC
MC
PR
Special Selling
This dealer
does not
AC
The Consumer’s Choice
• When both types of dealers are in
operation, smart consumers will
– Go to the high price, high service, dealer for
product information,
– Go to the low price, low service dealer, for
purchase.
• They will get a free ride.
Special Selling
The Retailer’s Choice
Retailer 2
ServiceService-Lean
Rich
2 =$0
ServiceLean
Retailer 1
ServiceRich
2 = -$50
1 = $100
1 = $0
2 = $0
2 = $100
1 = -$50
Special Selling
1 = $0
The Retailer’s Choice
Retailer 2
Service-Lean
ServiceRich
2 =$0
ServiceLean
Retailer 1
ServiceRich
2 = -$50
1 = $0
1 = $100
2 = $100
2 = $0
1 = -$50
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1 = $0
The Conclusion
• Service rich
retailers get driven
out
• The manufacturer
finds himself on the
“wrong” demand
curve.
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The Conclusion
• Service rich
retailers get driven
out
Ergo, the
• The manufacturer
manufacturer sets
finds himself
the special
RPM on
to force
“wrong” demand
selling
curve.
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Wal-Mart
• Wal-Mart would prefer for manufacturers to
rely on mass advertising.
• It cannot compete under RPM.
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Warning
• Which is best? It depends.
• All we have shown is why RPM may pay
off.
Special Selling
End
©2004 Charles
W. Upton
Special Selling