Vertical Restraints and the Forgotten Function of Prices in Brand Management

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Roman Inderst, Frank Maier-Rigaud, May 15, 2015

In this article the dual role of prices in the analysis of vertical effects is described. While at least some vertical restraints have the potential to entail anticompetitive harm, it is demonstrated that competition law may be overshooting the mark if no account is taken of both the rather fundamental use of price as a signal of quality and of the important role prices play for manufacturers in their overall “marketing mix” decisions.

The article reviews the theoretical and empirical literature, demonstrating a well-established link between price and quality. More generally, price is recognized by both practitioners and marketing scholars as a key part of a product’s brand image and, as such, as a key “cue” for consumers. It is thus far more than a simple transfer between consumers and firms, implying that a lower price is not always beneficial for efficiency and consumer welfare. As a result, there is a risk of curtailing the possibilities available to brand manufacturers to successfully develop a high quality brand and experiment with different distribution approaches in a changing market place.