Transparency and credible commitment: most-favoured-customer provisions and the sustainability of price discrimination
by James Stodder; Houman Younessi
International Journal of Trade and Global Markets (IJTGM), Vol. 6, No. 3, 2013

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.

Online publication date: Tue, 30-Sep-2014

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