Does the Service Argument Justify Resale Price Maintenance?

The paper analyzes the welfare effects of resale price maintenance (RPM) when the level of service of one retailer generates negative rather than positive spillovers for other retailers. A simple linear demand system is used and is linked to preferences of consumers via a discrete-choice approach. Under this specification, and in contrast to the literature dealing with this case, RPM may increase service (and price) or decrease service (and price). More interestingly, whether service increases or decreases due to RPM provides no clue to whether welfare increases or decreases due to RPM. Either case may arise independently of the effect of RPM on service.