How Does Price and Sales Correlation Affect Price Maintenance?

Abstract

Based on the relation between prices and sales, this study investigates how manufactures coordinate advertising and resale price maintenance. A real options analysis shows that market power theory and product information theory can lead to divergent results. Advertising is likely to influence resale price maintenance through the market power effect and the product information effect. When the market power effect is dominant, advertising will discourage manufacturers from imposing resale price maintenance; the opposite is true when the product information effect is dominant. Whether advertising induces the adoption of resale price maintenance depends on how advertising impacts the relation between prices and demand quantities. This study provides implications for marketing managers and antitrust policy makers. Marketing managers can coordinate their strategies of advertising and resale price maintenance based on real options models in this study. For the antitrust policy makers, the real options model indicates the per se rule against resale price maintenance should be reconsidered.