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What do Facilitating Practices Facilitate? An Empirical Investigation of Most-Favored-Nation Clauses in Natural Gas Contracts

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  • Crocker, Keith J
  • Lyon, Thomas P

Abstract

Long-term contracts often include most-favored-nation clauses (MFNs), which are nondiscrimination guarantees that obligate a buyer or seller to treat all trading partners symmetrically in pricing decisions. Recent theoretical work has shown that such clauses can facilitate tacit collusion by increasing the cost of selective price changes aimed at attracting new business. An alternative view is that MFNs serve to facilitate efficient price adjustment in extended exchange relationships. We test these competing hypotheses using data from long-term natural gas contracts, many of which employ MFNs. Our conclusion is that the pattern of MFN adoption, in conjunction with the structure of the nondiscrimination regions and the parallels with other nonstrategic price escalation provisions, lends strong support to the efficiency rationale. Copyright 1994 by the University of Chicago.

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  • Crocker, Keith J & Lyon, Thomas P, 1994. "What do Facilitating Practices Facilitate? An Empirical Investigation of Most-Favored-Nation Clauses in Natural Gas Contracts," Journal of Law and Economics, University of Chicago Press, vol. 37(2), pages 297-322, October.
    • Handle: RePEc:ucp:jlawec:v:37:y:1994:i:2:p:297-322
    DOI: 10.1086/467315
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    1. Kazuhiro Ohnishi, 2010. "Most-Favoured-Customer Pricing and Labour-Managed Oligopoly," Journal of Industry, Competition and Trade, Springer, vol. 10(1), pages 33-40, March.
    2. Fiona Scott Morton, 1996. "The Strategic Response by Pharmaceutical Firms to the Medicaid Most-Favored-Customer Rules," NBER Working Papers 5717, National Bureau of Economic Research, Inc.
    3. Gaynor, Martin & Vogt, William B., 2000. "Antitrust and competition in health care markets," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 27, pages 1405-1487, Elsevier.
    4. Guo, Di & Hua, Xinyu & Jiang, Kun, 2017. "Agency and strategic contracts: Theory and evidence from R&D agreements in the pharmaceutical industry," International Journal of Industrial Organization, Elsevier, vol. 54(C), pages 37-64.
    5. Maria Goddard & Russell Mannion, 1998. "From competition to co‐operation: new economic relationships in the National Health Service," Health Economics, John Wiley & Sons, Ltd., vol. 7(2), pages 105-119, March.
    6. Stephan, Levy, 2004. "Best-price Guarantees as a Quality Signal," MPRA Paper 13466, University Library of Munich, Germany, revised 02 Nov 2004.
    7. Jeffrey Church & Roger Ware, 1998. "Abuse of Dominance under the 1986 Canadian Competition Act," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 13(1), pages 85-129, April.
    8. Felipe Avilés-Lucero & Andre Boik, 2018. "Wholesale most-favored-nation clauses and price discrimination with negative consumption externalities: equivalence results," Journal of Regulatory Economics, Springer, vol. 54(3), pages 266-291, December.
    9. Helm, Roland & Kloyer, Martin, 2004. "Controlling contractual exchange risks in R&D interfirm cooperation: an empirical study," Research Policy, Elsevier, vol. 33(8), pages 1103-1122, October.
    10. Arbatskaya, Maria & Hviid, Morten & Shaffer, Greg, 2004. "On the Incidence and Variety of Low-Price Guarantees," Journal of Law and Economics, University of Chicago Press, vol. 47(1), pages 307-332, April.
    11. Hamelmann, Lisa & Haucap, Justus & Wey, Christian, 2015. "Die wettbewerbsrechtliche Zulässigkeit von Meistbegünstigungsklauseln auf Buchungsplattformen am Beispiel von HRS," DICE Ordnungspolitische Perspektiven 72, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    12. Aaron S. Edlin and Eric R. Emch., 1997. "The Welfare Losses from Price Matching Policies," Economics Working Papers 97-257, University of California at Berkeley.
    13. Gönenç Gürkaynak & Ayşe Güner & Sinan Diniz & Janelle Filson, 2016. "Most-favored-nation clauses in commercial contracts: legal and economic analysis and proposal for a guideline," European Journal of Law and Economics, Springer, vol. 42(1), pages 129-155, August.
    14. Martin Kloyer, 2004. "Opportunismus und Verhandlungsmacht in F&E-Lieferbeziehungen — Eine empirische Untersuchung," Schmalenbach Journal of Business Research, Springer, vol. 56(4), pages 333-364, June.
    15. Andrea Mantovani & Claudio Piga & Carlo Reggiani, 2019. "Much ado about nothing? Online platform price parity clauses and the EU Booking.com case," Economics Discussion Paper Series 1909, Economics, The University of Manchester.
    16. 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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