The Link between Purchase Delay and Resale Price Maintenance: Using the Real Options Approach

Guan-Ru Chen

Abstract


Why would a manufacturer want to impose resale price maintenance (RPM)? The traditional explanation of RPM is that it prevents retailers from free riding in providing services. In this paper, we show that the manufacturers still have incentives to impose RPM even their products do not need special services. When making a purchase decision, consumers choose from various alternatives, including options to delay the purchase, especially if they feel the price will be lower in the future. This paper connects frequent markdowns, purchase delay, and resale price maintenance (RPM) by using the real options analysis. The results indicate that the demand quantity under flexible pricing is lower than that under RPM, due to purchase delay. The profits of manufacturer will be lower without the use of RPM. This research also suggests that the manufacturer has more incentives to impose RPM on products with higher demand price elasticity. The results from real options analysis suggests that what we call consumers’ purchase delay, which is caused by retailers’ frequent markdowns makes RPM a desirable strategy for manufacturers.

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International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

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