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Most-Favored-Customer Clauses and Multilateral Contracting: When Nondiscrimination Implies Uniformity

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  • Patrick de Graba

Abstract

"DeGraba and Postlewaite (1992) show that the seller of a durable input can solve the time inconsistency problem by offering most-favored-customer (MFC) protection to buyers. McAfee and Schwartz (1994) show that if a supplier sells inputs to competing firms using two-part tariffs, MFC protection that allows a firm to replace its contract with a" contract "executed by any other firm will not solve the commitment problem, and argue this implies managers cannot use MFCs as a strategic commitment device in complex contracting situations. This paper shows that if the profits of the seller and the buyers are monotonic in each term of the contract, then applying MFC protection to" each term "of a contract allows a manager to solve his commitment problem in complex contacting situations. We show that "standard" contract arrangements (two-part tariffs, declining block tariffs, and royalties as a percentage of sales) meet this condition." Copyright 1996 The Massachusetts Institute of Technology.

Suggested Citation

  • Patrick de Graba, 1996. "Most-Favored-Customer Clauses and Multilateral Contracting: When Nondiscrimination Implies Uniformity," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(4), pages 565-579, December.
  • Handle: RePEc:bla:jemstr:v:5:y:1996:i:4:p:565-579
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    References listed on IDEAS

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    6. Sliwka, Dirk, 2003. "On the Hidden Costs of Incentive Schemes," IZA Discussion Papers 844, Institute for the Study of Labor (IZA).
    7. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 489-520.
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    Cited by:

    1. Teichmann, Isabel & von Schlippenbach, Vanessa, 2015. "Collusive effects of a monopolist's use of an intermediary to deliver to retailers," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112948, Verein für Socialpolitik / German Economic Association.
    2. Roman Inderst & Tommaso Valletti, 2009. "Price discrimination in input markets," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 1-19.
    3. Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Handbook of Industrial Organization, Elsevier.
    4. Rosenkranz, Stephanie & Schmitz, Patrick W., 2001. "Vertikale Unternehmenskooperationen," MPRA Paper 6930, University Library of Munich, Germany.
    5. Isabel Teichmann & Vanessa von Schlippenbach, 2014. "Collusive Effects of a Monopolist's Use of an Intermediary to Deliver to Retailers," Discussion Papers of DIW Berlin 1440, DIW Berlin, German Institute for Economic Research.

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