If a manufacturer does not exercise retail price maintenance, a free-rider problem may become evident among retailers and ultimately lead to lower profits for the manufacturer.

Question

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When a manufacturer does not enforce retail price maintenance, retailers may engage in undercutting, which can lead to a free-rider problem as retailers who do not invest in promoting the product can benefit from the efforts of those who do. This can ultimately lead to lower profits for the manufacturer.

If a Manufacturer Does Not Exercise Retail Price Maintenance, a Free-Rider