Most-Favored-Customer Protection versus Price Discrimination over Time
How should a seller price capacity that has no salvage value to heterogeneous customers whose valuations are private information? There are two periods, and the seller cannot precommit to prices in the later period. One option is price discrimination: first price high, then discount later if excess capacity remains. By offering most-favored-customer protection, the seller can charge more in advance, but will leave capacity unsold with positive probability. The author favors the most-favored-customer protection when capacity is large and leans toward price discrimination when customers are more uncertain about the degree of excess demand in the first period. Copyright 1991 by University of Chicago Press.