Most-Favored-Customer Pricing and Tacit Collusion

Thomas E. Cooper

RAND Journal of Economics, 1986, vol. 17, issue 3, 377-388

Abstract: This article examines the role of the most-favored-customer pricing policy as a practice facilitating coordination in a dynamic model of price-setting duopoly. This policy is a promise by a firm that if it later lowers price, it will rebate to current customers the difference between the price they pay now and the lower future price. By reducing each firm's incentive to reduce price, the policy enables both firms to offer higher prices and to enjoy higher profits. Consequently, at least one firm offers the policy in equilibrium. We illustrate these general results in an example.

Date: 1986
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