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Most-Favored-Customer Pricing and Tacit Collusion

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Author Info
Thomas E. Cooper
Abstract

This article examines the role of the most-favored-customer pricing policy as a practice facilitating coordination in a dynamic model of price-setting duopoly. This policy is a promise by a firm that if it later lowers price, it will rebate to current customers the difference between the price they pay now and the lower future price. By reducing each firm's incentive to reduce price, the policy enables both firms to offer higher prices and to enjoy higher profits. Consequently, at least one firm offers the policy in equilibrium. We illustrate these general results in an example.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 17 (1986)
Issue (Month): 3 (Autumn)
Pages: 377-388
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Handle: RePEc:rje:randje:v:17:y:1986:i:autumn:p:377-388

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  1. Linda A. Toolsema & Jan P. A. M. Jacobs, 2007. "Why do prices rise faster than they fall? With an application to mortgage rates," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 701-712. [Downloadable!]
    Other versions:
  2. Xia, Tian & Sexton, Richard J., 2002. "Can Food Processors Use Contracts To Influence Farm Cash Prices? The Competitive Implications Of Top-Of-The-Market And Related Pricing Clauses," 2002 Annual meeting, July 28-31, Long Beach, CA 19776, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  3. Switgard Feuerstein, 2005. "Collusion in Industrial Economics—A Survey," Journal of Industry, Competition and Trade, Springer, vol. 5(3), pages 163-198, December. [Downloadable!] (restricted)
  4. Dmitry Shapiro & Xianwen Shi, 2008. "Market Segmentation: The Role of Opaque Travel Agencies," Working Papers tecipa-310, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  5. Kathryn Spier, 2001. "The Use of "Most-Favored-Nation" Clauses in Settlement of Litigation," Berkeley Olin Program in Law & Economics, Working Paper Series 1024, Berkeley Olin Program in Law & Economics. [Downloadable!]
  6. Jason Allen & Darcey McVanel, 2009. "Price Movements in the Canadian Residential Mortgage Market," Working Papers 09-13, Bank of Canada. [Downloadable!]
  7. Stephan, Levy, 2004. "Best-price Guarantees as a Quality Signal," MPRA Paper 13466, University Library of Munich, Germany, revised 02 Nov 2004. [Downloadable!]
  8. Leslie M. Marx & Greg Shaffer, 2004. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity: Comment," American Economic Review, American Economic Association, vol. 94(3), pages 796-801, June. [Downloadable!]
  9. Edwin L.-C. Lai, 2008. "The most-favored nation rule in club enlargement negotiation," Working Papers 0815, Federal Reserve Bank of Dallas. [Downloadable!]
  10. Jeffrey Church & Roger Ware, 1998. "Abuse of Dominance under the 1986 Canadian Competition Act," Review of Industrial Organization, Springer, vol. 13(1), pages 85-129, April. [Downloadable!] (restricted)
  11. Morten Hviid & Greg Shaffer, 2008. "Matching Own Prices, Rivals' Prices, or Both," Working Papers 08-26, Centre for Competition Policy, University of East Anglia. [Downloadable!]
  12. Fiona Scott Morton, 1996. "The Strategic Response by Pharmaceutical Firms to the Medicaid Most-Favored-Customer Rules," NBER Working Papers 5717, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Roman Inderst & Tommaso Valletti, 2006. "Price Discrimination in Input Markets," CEIS Research Paper 73, Tor Vergata University, CEIS. [Downloadable!]
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