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Most-Favored Treatment Provisions as Nondiscrimination Guarantees

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  • David Butz

Abstract

A firm employs suppliers who make specific investments. Because output demand is uncertain and the cost of enumerating contingencies high, the firm retains some unilateral control over the input quantities it purchases. To allay suppliers' concerns over potential opportunism the firm must commit not to pit them against one another ex post by threatening to buy less from those who refuse to discount their prices. By extending most-favored treatment guarantees the firm commits not to discriminate. In some circumstances this generates efficient and opportunism-free outcomes. In others it is less effective but may remain attractive relative to other options. Evidence from field market contracts for natural gas corroborates this nondiscrimination hypothesis.

Suggested Citation

  • David Butz, 1995. "Most-Favored Treatment Provisions as Nondiscrimination Guarantees," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 2(1), pages 65-86.
    • Handle: RePEc:taf:ijecbs:v:2:y:1995:i:1:p:65-86
    DOI: 10.1080/758521097
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    References listed on IDEAS

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    1. Fudenberg, Drew & Tirole, Jean, 1989. "Noncooperative game theory for industrial organization: An introduction and overview," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 5, pages 259-327, Elsevier.
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    Cited by:

    1. Pinar Akman & Morten Hviid, 2005. "A Most-Favoured-Customer Guarantee with a Twist," Working Papers 05-8, Centre for Competition Policy, University of East Anglia.
    2. Spier, Kathryn E., 2001. "The Use of “Most-Favored-Nation” Clauses in Settlement of Litigation," Berkeley Olin Program in Law & Economics, Working Paper Series qt7hm4d39g, Berkeley Olin Program in Law & Economics.

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    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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