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Demand Uncertainty and Price Maintainance: Markdowns as Destructive Competition

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  • Howard P. Marvel
  • Raymond Deneckere
  • James Peck

Abstract

This paper offers a new theory of destructive competition. We compare minimum resale price maintenance (RPM) to retail market clearing in a model with a monopolistic manufacturer selling to competitive retailers. In both the RPM and Flexible-Pricing Games, retailers must order inventories before the realization of demand uncertainty. We find that manufacturer profits and equilibrium inventories are higher under RPM than under market clearing. Surprisingly, consumer surplus can also be higher, in which case unfettered retail competition can legitimately be called destructive.

Suggested Citation

  • Howard P. Marvel & Raymond Deneckere & James Peck, 1995. "Demand Uncertainty and Price Maintainance: Markdowns as Destructive Competition," Working Papers 018, Ohio State University, Department of Economics.
    • Handle: RePEc:osu:osuewp:018
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    File URL: http://ecolan.sbs.ohio-state.edu/pdf/marvel/dmp-flex.pdf
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