Most-Favored-Customer Pricing and Tacit Collusion
AbstractThis 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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Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 17 (1986)
Issue (Month): 3 (Autumn)
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Web page: http://www.rje.org
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- Spier, Kathryn E., 2001. "The Use of â€œMost-Favored-Nationâ€ Clauses in Settlement of Litigation," Berkeley Olin Program in Law & Economics, Working Paper Series qt7hm4d39g, Berkeley Olin Program in Law & Economics.
- Kyle, Margaret & Ridley, David B., 2007. "Would Greater Transparency and Uniformity Of Health Care Prices Benefit Poor Patients?," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
- 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.
- 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.
- Kazuhiro Ohnishi, 2011. "A Quantity-Setting Mixed Duopoly with Inventory Investment as a Coordination Device," Annals of Economics and Finance, Society for AEF, vol. 12(1), pages 109-119, May.
- Edwin L.-C. Lai, 2008. "The most-favored nation rule in club enlargement negotiation," Working Papers 0815, Federal Reserve Bank of Dallas.
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