Title: Transparency and credible commitment: most-favoured-customer provisions and the sustainability of price discrimination
Authors: James Stodder; Houman Younessi
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.
Int. J. of Trade and Global Markets, 2013 Vol.6, No.3, pp.275 - 300
Submission date: 22 May 2012
Date of acceptance: 08 Oct 2012
Available online: 21 May 2013