Vertical Price Controls with Uncertain Demand

A manufacturer distributes output before knowing demand and thus risks making more than its rivalrous independent retailers can sell at the monopoly price. If demand is low, retailers may therefore resell more than the joint profit‐maximizing output. Anticipating this, they will not pay as much for the merchandise ex ante as they would if the manufacturer could commit to preventing rivalry. The manufacturer has many options, including vertical integration, chain outlets, restricted output, buy backs, just‐in‐time deliveries, and minimum resale prices. The article discusses each option's advantages and disadvantages and concludes that all roads lead to resale price maintenance. The article closes with an alternative to the dealercartel hypothesis for minimum resale prices.