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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. Cooper, Thomas E. & Fries, Timothy L., 1991. "The most-favored-nation pricing policy and negotiated prices," International Journal of Industrial Organization, Elsevier, vol. 9(2), pages 209-223, June.
  2. 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.
  3. Stephan, Levy, 2004. "Best-price Guarantees as a Quality Signal," MPRA Paper 13466, University Library of Munich, Germany, revised 02 Nov 2004.
  4. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
  5. 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.
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