Minimum Advertised Price

 

By Raja Kali

 

This paper examines Minimum Advertised Price (MAP), a vertical restraint that is observed in manufacturer-retailer interactions. Under MAP, the manufacturer announces that it will reimburse retailers for a fraction of their advertising expenditures if retailers do not advertise the product at below a specified price. MAP can be considered a combination of Resale Price Maintenance (RPM) and a cooperative advertising subsidy. Current antitrust law treats RPM as per se illegal whereas MAP is judged according to a rule of reason. A framework is presented within which neither a minimum retail price nor a cooperative advertising subsidy is individually sufficient to enable maximization of profits in the complete manufacturer-retailer structure, but the two instruments together are. MAP is therefore a sufficient instrument for the maximization of joint profits. We argue that MAP can also be designed as a second-best instrument that replicates RPM.