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Bilateral Most-Favored-Customer Pricing and Collusion

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  • William S. Neilson
  • Harold Winter

Abstract

In a two-period differentiated products duopoly model, most-favored-customer (MFC) pricing policies allow firms to commit to prices above the Bertrand prices. It is shown here, however, that unless a restrictive and unappealing assumption is made about demand, there is no equilibrium in which both firms adopt MFC policies. The restrictive assumption is that at least one firm's demand is more responsive to changes in its opponent's price than to changes in its own price; otherwise, firms have an incentive to deviate from a greater-than-Bertrand price in the first period.

Suggested Citation

  • 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.
    • Handle: RePEc:rje:randje:v:24:y:1993:i:spring:p:147-155
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    Cited by:

    1. Granero, Lluís M. & Ordóñez-de-Haro, José M., 2015. "Entry under uncertainty: Limit and most-favored-customer pricing," Mathematical Social Sciences, Elsevier, vol. 76(C), pages 1-11.
    2. Kazuhiro Ohnishi, 2010. "Most-Favoured-Customer Pricing and Labour-Managed Oligopoly," Journal of Industry, Competition and Trade, Springer, vol. 10(1), pages 33-40, March.
    3. Pinar Akman & Morten Hviid, 2005. "A Most-Favoured-Customer Guarantee with a Twist," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2005-08, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    4. Granero, Lluís M., 2013. "Most-favored-customer pricing, product variety, and welfare," Economics Letters, Elsevier, vol. 120(3), pages 579-582.
    5. Xu, Frances Zhiyun, 2011. "Optimal best-price policy," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 628-643, September.
    6. Gilo, David & Spiegel, Yossi, 2018. "The antitrust prohibition of excessive pricing," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 503-541.
    7. Stephan, Levy, 2004. "Best-price Guarantees as a Quality Signal," MPRA Paper 13466, University Library of Munich, Germany, revised 02 Nov 2004.
    8. Klibanoff Peter & Kundu Tapas, 2010. "Monopoly Pricing under a Medicaid-Style Most-Favored-Customer Clause and Its Welfare Implication," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-43, August.
    9. Cohen-Vernik, Dinah & Pazgal, Amit, 2017. "Price Adjustment Policy with Partial Refunds," Journal of Retailing, Elsevier, vol. 93(4), pages 507-526.
    10. Kazuhiro Ohnishi, 2009. "Capacity Investment and Mixed Duopoly with State-Owned and Labor-Managed Firms," Annals of Economics and Finance, Society for AEF, vol. 10(1), pages 49-64, May.
    11. Foros, Øystein & Kind, Hans Jarle & Shaffer, Greg, 2015. "Apple's Agency Model and the Role of Resale Price Maintenance," Discussion Papers 2015/32, Norwegian School of Economics, Department of Business and Management Science.
    12. Morten Hviid & Greg Shaffer, 2010. "Matching Own Prices, Rivals' Prices Or Both?," Journal of Industrial Economics, Wiley Blackwell, vol. 58(3), pages 479-506, September.
    13. Butz, David A, 1997. "Vertical Price Controls with Uncertain Demand," Journal of Law and Economics, University of Chicago Press, vol. 40(2), pages 433-459, October.
    14. Kazuhiro Ohnishi, 2003. "A Note on the Most‐Favoured‐Customer Pricing Policy," Bulletin of Economic Research, Wiley Blackwell, vol. 55(4), pages 407-413, October.

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