Double Moral Hazard and Resale Price Maintenance

Incentives for resale price maintenance (RPM) are studied in a wholesaler-retailer relationship in which both firms make a nonprice choice subject to moral hazard. The best attainable contract has vertical externalities in both nonprice choices and the choice of consumers' price if delegated to the retailer. RPM controls the latter externality but interacts with the other externalities as well. As a consequence, either minimum or maximum vertical price fixing can be optimal in spite of a successive-monopoly specification. Similar incentives exist for writing other variables into contract, such as the capital input of the retailer.