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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- 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.
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- repec:ner:toulou:http://neeo.univ-tlse1.fr/2398/ is not listed on IDEAS
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- 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.
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