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Best-price Guarantees as a Quality Signal

Author

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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

    as
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    4. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
    5. 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.
    6. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
    7. William S. Neilson & Harold Winter, 1993. "Bilateral Most-Favored-Customer Pricing and Collusion," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 147-155, Spring.
    8. Besanko, David & Lyon, Thomas P., 1993. "Equilibrium incentives for most-favored customer clauses in an oligopolistic industry," International Journal of Industrial Organization, Elsevier, vol. 11(3), pages 347-367, September.
    9. Butz, David A, 1990. "Durable-Good Monopoly and Best-Price Provisions," American Economic Review, American Economic Association, vol. 80(5), pages 1062-1076, December.
    10. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-239, March.
    11. Shiou Shieh, 1996. "Price and Money-Back Guarantees as Signals of Product Quality," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 361-377, September.
    12. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-149, April.
    13. Carl Shapiro, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 659-679.
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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.

    More about this item

    Keywords

    Most favored customer; MFCC; best-price guarantees; signaling; game theory; industrial organization;

    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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