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Exploiting Future Settlements: A Signalling Model of Most-Favored-Nation Clauses in Settlement Bargaining

  • Andrew F. Daughety

    ()

    (Vanderbilt University)

  • Jennifer F. Reinganum

    ()

    (Vanderbilt University)

Most-favored-nation (MFN) clauses have been used to address a repeat player's time-inconsistency problem in international trade, durable-goods monopoly pricing, franchise contracting, and settlement bargaining. We argue that a nonrepeat player (an early-bargaining plaintiff) can use an MFN to profitably modify the subsequent bargaining game between the defendant and a later-bargaining plaintiff. If an MFN is triggered (which can happen in equilibrium), the early plaintiff receives an additional payment. Less obviously, the early plaintiff's incentives for information revelation are enhanced by this potential payment, so the defendant can resort to trial less frequently. Conditions exist such that an MFN increases total surplus.

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Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 35 (2004)
Issue (Month): 3 (Autumn)
Pages: 467-485

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Handle: RePEc:rje:randje:v:35:y:2004:3:p:467-485
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  1. Andrew F. Daughety & Jennifer F. Reinganum, 1999. "Hush Money," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 661-678, Winter.
  2. Choi, Jay Pil, 1995. "Optimal tariffs and the choice of technology Discriminatory tariffs vs. the 'Most Favored Nation' clause," Journal of International Economics, Elsevier, vol. 38(1-2), pages 143-160, February.
  3. Neilson, William S. & Winter, Harold, 1994. "Enhancing bargaining power with most-favored-customer pricing," Economics Letters, Elsevier, vol. 44(1-2), pages 61-66.
  4. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.
  5. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
  6. Stephan, Levy, 2004. "Best-price Guarantees as a Quality Signal," MPRA Paper 13466, University Library of Munich, Germany, revised 02 Nov 2004.
  7. Butz, David A, 1990. "Durable-Good Monopoly and Best-Price Provisions," American Economic Review, American Economic Association, vol. 80(5), pages 1062-76, December.
  8. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  9. Jennifer F. Reinganum & Louise L. Wilde, 1986. "Settlement, Litigation, and the Allocation of Litigation Costs," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 557-566, Winter.
  10. Andrew F. Daughety & Jennifer F. Reinganum, 2002. "Informational Externalities in Settlement Bargaining: Confidentiality and Correlated Culpability," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 587-604, Winter.
  11. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
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