Demand Uncertainty and Price Maintenance: Markdowns as Destructive Competition

Abstract

This paper offers a new theory of destructive competition. The authors compare minimum resale price maintenance to retail market-clearing in a model with a monopolistic manufacturer selling to competitive retailers. In both the resale price maintenance and flexible-price games, retailers must order inventories before the realization of demand uncertainty. The authors find that manufacturer profits and equilibrium inventories are higher under resale price maintenance than under market-clearing. Surprisingly, consumer surplus can also be higher, in which case unfettered retail competition can legitimately be called 'destructive.' Copyright 1997 by American Economic Association.