Equilibrium incentives for most-favored customer clauses in an oligopolistic industry

David Besanko*, Thomas P. Lyon

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

14 Scopus citations

Abstract

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 independently decides 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, 377-388)], 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.

Original languageEnglish (US)
Pages (from-to)347-367
Number of pages21
JournalInternational Journal of Industrial Organization
Volume11
Issue number3
DOIs
StatePublished - Sep 1993

ASJC Scopus subject areas

  • Industrial relations
  • Aerospace Engineering
  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management
  • Industrial and Manufacturing Engineering

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