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What is Resale Price Maintenance?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 19 November 2016
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    Conjecture Corporation
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Resale price maintenance is a term that is used to describe a strategy where the manufacturer of products reaches an agreement with its distributors that those products will only be offered for sale at either specific prices, above a specified price floor, or below a specific price ceiling. This process creates a situation where the manufacturer has some control over the market price of the products, and can ensure that a reasonable amount of profit is earned from the deal. Distributors often like the idea of resale price maintenance, since the strategy helps to prevent competition among the different sellers of the products from competing solely on the basis of price, ultimately reducing profits for everyone concerned. This concept of price maintenance can be applied to just about any situation where goods and services are sold through distributors or resellers.

There are two schools of thought regarding the use of resale price maintenance. One concept holds that this type of arrangement between a manufacturer and its distributors creates a situation where all parties involved stand to earn a decent amount of profit, without creating undue hardship on any one of the distributors. From this perspective, the terms of the agreement prevent any distributor from undercutting other distributors by introducing rock bottom pricing in an effort to capture the majority of sales volume.

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A different perspective of the resale price maintenance strategy is that this approach places restrictions on free trade. Here, the idea is that the distributor should be free to use whatever means necessary to move the products, including the use of low pricing to attract consumers. By not restricting the pricing offered by the distributors, the ability to earn profits switches to volume rather than profit earned per unit. Any distributors who are unable to compete are forced out of business, and the manufacturer simply provides additional units for sale by those distributors who remain active within the marketplace.

Debates on the effects of resale price maintenance have led to periods where the practice was either considered illegal or at least restricted in some manner. As a result, variations on the approach have developed over time. In areas where the strategy is legal, it may take the form of what is know as resale price maintenance, where the distributor sells the products at a predetermined price. Another approach is known as price floor or minimum resale price maintenance, where the distributor agrees to sell the products above a basic or minimum unit price. A third alternative is known as maximum resale price maintenance, where the distributor will not sell the products for more than a maximum unit price.

In areas where governmental regulations allow resale price maintenance, the terms generally provide the manufacturer the right to take action if a distributor breaches the agreement. Should the distributor attempt to covertly sell the products at any price not allowed by the agreement in what is known as a gray market, the manufacturer can immediately terminate the distributor contract, with no notice in advance. In addition, the manufacturer may be able to legally demand damages from the distributor if it can be proven the activity reduced profits or otherwise harmed the business interests of the manufacturer.

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