The dominant eﬃciency defense both in Leegin and the European guidelines are service incentives: A manufacturer uses minimum RPM to provide retailers with the appropriate incentives for socially desirable services that would be under-provided with price competition. The economic foundation of this argument rests on models with a single manufacturer. Yet in many RPM cases, including Leegin, competing manufacturers sell through common retailers. With this paper, we shed light on the eﬀects of RPM when competing manufacturers sell their products through common retailers who provide sales services. We set up a model which shows that if the competitive retail margins are low, each manufacturer ﬁxes a minimum price to induce favorable retail services. With symmetric manufacturers, products are equally proﬁtable in equilibrium and no product is favored, as without RPM, but retail prices are higher. We show that minimum RPM can create a prisoner’s dilemma for manufacturers without increasing and possibly even decreasing the overall service quality.
Competition policy has to distinguish between cases in which externalities yield an insuﬃcient level of retail services and cases in which the service level is suﬃcient or even better without RPM. The danger is that competition policy relies too much on the established service arguments with a single manufacturer, which suggest that minimum RPM increases eﬃciency. Within our model, raising retail margins of only one product through minimum RPM indeed induces retailers to allocate more services to that product. Hence a manufacturer can demonstrate that minimum RPM is eﬀective in increasing services for its product. However, if our model applies, minimum RPM does not induce any eﬃciency gains in equilibrium, but increases retail prices and can even decrease the quality of service.