Title: Transparency and credible commitment: most-favoured-customer provisions and the sustainability of price discrimination

Authors: James Stodder; Houman Younessi

Addresses: Lally School of Management & Technology, Rensselaer Polytechnic Institute, 275 Windsor Street, Hartford, CT 06120-2991, USA ' Department of Engineering and Science, Rensselaer Polytechnic Institute, 275 Windsor Street, Hartford, CT 06120-2991, USA

Abstract: Lump-sum rebates can protect price-discriminators against reselling. Large customers, however, can bargain for a larger rebate. This paper shows how sellers can make a credible commitment to not bargain: a price discriminating formula is published as a Most-Favoured-Customer (MFC) contract: if any MFC gets a rebate greater than specified by formula, so do all. The larger the rebate asked for, or the finer the degree of discrimination, the more groups affected by deviations from this formula. Thus the seller loses more revenue. Incentive and welfare effects are illustrated with global incomes data.

Keywords: market structure; pricing; imperfect competition; income distribution; transparency; credible commitment; most favoured customer; MFC provisions; price discrimination; lump-sum rebates; incentive effects; welfare effects.

DOI: 10.1504/IJTGM.2013.054903

International Journal of Trade and Global Markets, 2013 Vol.6 No.3, pp.275 - 300

Received: 23 May 2012
Accepted: 08 Oct 2012
Published online: 30 Sep 2014 *

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