What do Facilitating Practices Facilitate? An Empirical Investigation of Most-Favored-Nation Clauses in Natural Gas Contracts
AbstractLong-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 InfoArticle provided by University of Chicago Press in its journal Journal of Law & Economics.
Volume (Year): 37 (1994)
Issue (Month): 2 (October)
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Web page: http://www.journals.uchicago.edu/JLE/
Other versions of this item:
- Crocker, K.J. & Lyon, T.P., 1993. "What Do "Facilitating Practices" Facilitates? An Empirical Investigation of Most-Favored Nation Clauses in Natural Gas Contracts," Papers 10-93-2, Pennsylvania State - Department of Economics.
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