Using the Rational Expectations Model to Investigate the Relationship Between New Products Introductions and Resale Price Maintenance

When a product is in its introduction stage, the proportion of consumers with information about product quality is relatively low. For most consumers, price is the only indication of a product’s quality. The rational expectation model predicts that at the introduction stage, the price should be stable in order to communicate quality-related information efficiently. Therefore, manufacturers have incentives to use resale price maintenance (RPM) to reduce the noise from intrabrand price competition. Over time, the demand for RPM declines as the proportion of consumers with access to quality-related information gradually increases.