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What do Facilitating Practices Facilitate? An Empirical Investigation of Most-Favored-Nation Clauses in Natural Gas Contracts

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  • Crocker, Keith J
  • Lyon, Thomas P

Abstract

Long-term contracts often include most-favored-nation clauses (MFNs), which are nondiscrimination guarantees that obligate a buyer or seller to treat all trading partners symmetrically in pricing decisions. Recent theoretical work has shown that such clauses can facilitate tacit collusion by increasing the cost of selective price changes aimed at attracting new business. An alternative view is that MFNs serve to facilitate efficient price adjustment in extended exchange relationships. We test these competing hypotheses using data from long-term natural gas contracts, many of which employ MFNs. Our conclusion is that the pattern of MFN adoption, in conjunction with the structure of the nondiscrimination regions and the parallels with other nonstrategic price escalation provisions, lends strong support to the efficiency rationale. Copyright 1994 by the University of Chicago.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Law & Economics.

Volume (Year): 37 (1994)
Issue (Month): 2 (October)
Pages: 297-322

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Handle: RePEc:ucp:jlawec:v:37:y:1994:i:2:p:297-322

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Web page: http://www.journals.uchicago.edu/JLE/

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Cited by:
  1. 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.
  2. Gaynor, Martin & Vogt, William B., 2000. "Antitrust and competition in health care markets," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 27, pages 1405-1487 Elsevier.
  3. Spier, Kathryn E., 2001. "The Use of “Most-Favored-Nation†Clauses in Settlement of Litigation," Berkeley Olin Program in Law & Economics, Working Paper Series qt7hm4d39g, Berkeley Olin Program in Law & Economics.
  4. 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.
  5. Stephan, Levy, 2004. "Best-price Guarantees as a Quality Signal," MPRA Paper 13466, University Library of Munich, Germany, revised 02 Nov 2004.

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