Tuesday, October 23, 2012

Aussies Find Cosmetics Firm Guilty of RPM

The Australian Competition and Consumer Commission (ACCC) has clamped down on so-called "resale price maintenance" (RPM) by Eternal Beauty Products. In this case, the cosmetics maker pressured online retailers to either sell goods at certain prices or risk being cut off altogether. Most countries have had some sort of anti-RPM law on the books. At first blush, it seems quite obvious that that a manufacturer requiring a retailer to set higher prices must not be in the public interest. Until, you ask a simple question, "Why would manufacturers do this?"
  1. If the manufacturer was a monopolist, it might be a way of getting higher final prices. But, why not simply raise the wholesale price? Given the wholesale price, the manufacturer should want as low a retail price as possible to sell as many units as possible. Anyway, in this this case, like most, the manufacturer was one of many competitors.
  2. If the industry was oligopolistic, the manufacturers may be collectively using retailers to enforce higher prices. This could be a way to reduce rivalry. But then all cosmetic firms would be party to the deal and they would have to impose price restraints on all retail channels. This appears to have been far from the case.
  3. If the product was new or differentiated and the target market was poorly informed about the product's characteristics relative to competitors, the manufacturer may want to encourage point-of-sale (POS) services. Retail sales associates may be uniquely positioned to demonstrate why this product might be preferred. But this imposes costs on the retailers who perform these POS services. They may be willing to do so for a higher margin. But not if some online retailer offers the same product without the POS services at a discount. Customers will may make an initial purchase with the full service retailer and then shift orders to the cheaper online vendor. In this case, no retailer will be willing to offer the POS services and suffer the free-riding by online discounters. Without POS services, the product fails. To counter this, the manufacturer bans discounting by setting a minimum retail price that includes enough of a margin that retailers want to offer the POS services. In this theory of RPM, customers benefit from small manufacturers bringing new and innovative products to the market. Too bad the ACCC got in the way.


  1. Can the manufacturer not charge a higher wholesale price to online retailers? Or offer a discount to retailers who do provide POS services?

  2. These strategies, and a few more, can solve the free-riding problem. For example, manufacturers often award an exclusive franchise so that the retailer will be able to charge a higher margin without fear of a discounter emerging - easier in pre-Internet days. And it is common for manufacturers to pay for the POS demonstration services within a retail outlet. With explicit discounts, however, it is possible to run afoul of antitrust laws if they are constructed poorly.