Equilibrium Incentives for Most-Favored Customer Clauses in Oligopolistic Industry

This paper analyzes the economics of contemporaneous most-favored customer clauses (MFCC) in a non-cooperative n-firm oligopoly. In the first stage of a two-stage game, each firm indepedently decided whether to adopt MFCC; in the second stage, firms set prices non-cooperatively, given the first stage choices. In contrast to work on retroactive MFCC by Cooper [The RAND Journal of Economics (1986, 17, 37-388)], our analysis shows that not adopting MFCC can be a dominant strategy. The difference between our results and Cooper's highlights important differences between retroactive and contemporaneous MFCC and suggests that MFCC are a less powerful facilitating practice than retroactive MFCC. Our analysis also sheds new light on Grether and Plott's [Economic Inquiry (1984, 22, 497-507)] experimental results regarding the effects of MFCC on average industry prices.