Maximum Resale Price Maintenance and Retailer Cartel Profits: Evidence from the Indian Pharmaceutical Industry

(ProQuest: ... denotes formulae omited.) Resale price maintenance (RPM), a vertical agreement between a manufacturer and a retailer that specifies a fixed minimum or maximum resale price, can be procompetitive.1 Minimum RPM can help a manufacturer maintain retail service quality and enhance brand reputation.2 Maximum RPM can limit retailer market power and improve the efficiency of franchising.3 Therefore, in the United States, the per se illegality of maximum RPM ended in 1997 after State Oil Company v. Khan, and that of minimum RPM ended in 2007 after Leegin v. PSKS.4 RPM is not per se legal in the United States, but it remains subject to a rule-ofreason analysis. "6 Economic theory suggests that non-binding price ceilings like MRPM serve as focal points for tacit collusion.7 Also, in theory, prices under a system of RPM are more uniform, deviations from cartel agreements are easier to detect, collusion is easier to sustain even when wholesale prices are difficult to observe, and retailer profits are larger as retail services are allocated toward the high-priced products, excluding rivals.8 The Court's opinion in Leegin echoes these theoretical concerns: "A manufacturer with market power, by comparison, might use resale price maintenance to give retailers an incentive not to sell the products of smaller rivals or new entrants. The empirical study is set in the Indian pharmaceutical industry, featuring a dominant retailer pharmacy cartel that enforces a minimum level of retailer margin and boycotts pharmaceutical manufacturers that breach the minimum.10 I exploit the mid-2013 price control regulation in India that expanded the set of pricecontrolled medicines threatening retailer profits due to: (a) a potential decline in the absolute price levels of newly pricecontrolled medicines; and (b) a likely reduction in the retailer margins on these medicines. [...]in theory, manufacturers can increase MRP as long as consumer demand can be sustained (e.g., through investment in advertising or sales force). considerable evidence indicates that expert intermediaries and sales forces can alter the price sensitivity of consumers, causing them to purchase a higher-priced alternative.13 Therefore, the extent to which MRP can be increased depends on the specific industry context. in contexts where the retailer is a driver of consumer choice, products with higher prices but higher retailer margins grow to become market leaders.