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Best-price Guarantees as a Quality Signal

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  • Stephan, Levy

Abstract

This paper shows that best-price guarantees can enhance welfare, in contrast to findings in recent literature. While a high-quality monopolist can signal its quality strictly through high prices, using both price and a best-price guarantee may allow the firm to signal its quality with a smaller price distortion. A low-quality monopolist will not mimic its high-quality counterpart by offering a best-price guarantee, because the accompanying restrictions are too costly. Best-price guarantees are similar to money-back guarantees and other more general contracts in their ability to allow less costly signaling. The welfare enhancing capabilities of these contracts imply that the antitrust authorities should regard them more favorably.

Suggested Citation

  • Stephan, Levy, 2004. "Best-price Guarantees as a Quality Signal," MPRA Paper 13466, University Library of Munich, Germany, revised 02 Nov 2004.
    • Handle: RePEc:pra:mprapa:13466
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    File URL: https://mpra.ub.uni-muenchen.de/13466/1/MPRA_paper_13466.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Kathryn E. Spier, 2003. "“Tied to the Mast”: Most-Favored-Nation Clauses in Settlement Contracts," The Journal of Legal Studies, University of Chicago Press, vol. 32(1), pages 91-120, January.
    2. Andrew F. Daughety & Jennifer F. Reinganum, 2004. "Exploiting Future Settlements: A Signalling Model of Most-Favored-Nation Clauses in Settlement Bargaining," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 467-485, Autumn.
    3. 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.
    4. Дзагурова Наталия Борисовна, 2016. "Направления Повышения Привлекательности Лотерей, Сопряженных С Осуществлением Кооперативных Специфических Инвестиций," Journal of Institutional Studies Journal of Institutional Studies (Журнал институциональных исследований), CyberLeninka;Общество с ограниченной ответственностью «Гуманитарные перспективы», vol. 8(4), pages 53-71.

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    More about this item

    Keywords

    Most favored customer; MFCC; best-price guarantees; signaling; game theory; industrial organization;
    All these keywords.

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L00 - Industrial Organization - - General - - - General

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