Most-favored-customer pricing, product variety, and welfare

Most-favored-customer (MFC) clauses are usually seen as anticompetitive co-ordination devices that firms adopt for the purpose of higher prices. Here, I examine the welfare impact of MFC clauses under endogenous product variety. Product variety is relevant because prospective higher prices from MFC...

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Bibliographic Details
Published in:Economics letters 2013-09, Vol.120 (3), p.579-582
Main Author: Granero, Lluís M.
Format: Article
Language:English
Subjects:
Antitrust policy
Clauses
Contracts
Customers
Economic theory
Fixed costs
Most-favored-customer clause
Multi-product firms
Pricing policies
Product lines
Product variety
Products
Studies
Welfare
Welfare economics
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Summary:Most-favored-customer (MFC) clauses are usually seen as anticompetitive co-ordination devices that firms adopt for the purpose of higher prices. Here, I examine the welfare impact of MFC clauses under endogenous product variety. Product variety is relevant because prospective higher prices from MFC clauses can be anticipated by multi-product firms in their provision of product lines. Under such circumstances, I find that these clauses can be socially harmful, but this is not always the case: they tend to be socially neutral for relatively large fixed costs of product-line assortment, harmful for intermediate costs, and beneficial for relatively small costs. •Previous results suggest most-favored-customer (MFC) clauses as anticompetitive.•The welfare impact of MFC clauses is examined under endogenous product-line assortment.•It is shown that MFC clauses can reduce welfare, but they can increase it sometimes.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2013.06.028