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Best-price Guarantees as a Quality Signal

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Author Info
Stephan, Levy

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Abstract

This paper shows that best-price guarantees can enhance welfare, in contrast to findings in recent literature. While a high-quality monopolist can signal its quality strictly through high prices, using both price and a best-price guarantee may allow the firm to signal its quality with a smaller price distortion. A low-quality monopolist will not mimic its high-quality counterpart by offering a best-price guarantee, because the accompanying restrictions are too costly. Best-price guarantees are similar to money-back guarantees and other more general contracts in their ability to allow less costly signaling. The welfare enhancing capabilities of these contracts imply that the antitrust authorities should regard them more favorably.

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File URL: http://mpra.ub.uni-muenchen.de/13466/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13466.

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Date of creation: 02 Nov 2004
Date of revision: 02 Nov 2004
Handle: RePEc:pra:mprapa:13466

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Related research
Keywords: Most favored customer; MFCC; best-price guarantees; signaling; game theory; industrial organization;

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Find related papers by JEL classification:
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
L00 - Industrial Organization - - General - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Riordan, Michael H, 1986. "Monopolistic Competition with Experience Goods," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 265-79, May. [Downloadable!] (restricted)
  2. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November. [Downloadable!] (restricted)
  3. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law & Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  4. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May. [Downloadable!] (restricted)
  5. Thomas E. Cooper, 1986. "Most-Favored-Customer Pricing and Tacit Collusion," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 377-388, Autumn. [Downloadable!] (restricted)
  6. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)
  7. William S. Neilson & Harold Winter, 1993. "Bilateral Most-Favored-Customer Pricing and Collusion," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 147-155, Spring. [Downloadable!] (restricted)
  8. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-39, March. [Downloadable!] (restricted)
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  9. Besanko, David & Lyon, Thomas P., 1993. "Equilibrium incentives for most-favored customer clauses in an oligopolistic industry," International Journal of Industrial Organization, Elsevier, vol. 11(3), pages 347-367, September. [Downloadable!] (restricted)
  10. Bagwell, Kyle, 1991. "Optimal Export Policy for a New-Product Monopoly," American Economic Review, American Economic Association, vol. 81(5), pages 1156-69, December. [Downloadable!] (restricted)
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  11. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-94, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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!]
  2. Andrew F. Daughety & Jennifer F. Reinganum, 2002. "Exploiting Future Settlements: A Signalling Model of Most-Favored-Nation Clauses In Settlement Bargaining," Working Papers 0221, Department of Economics, Vanderbilt University, revised Oct 2002. [Downloadable!]
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