The most-favored-nation pricing policy and negotiated prices
Previous work has viewed the most-favored-nation (MFN) contract as a practice capable of facilitating collusion among sellers, but this paper shows that even a monopoly seller may gain by including the MFN provision in sales contracts. We consider a case in which the seller negotiates price separately with each of two buyers. By including a MFN clause in her contract with the first buyer, the seller raises her cost of granting price concessions to the second buyer. This increases the seller's bargaining strength with respect to the second buyer, thereby helping her negotiate a higher price.
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