The Anticompetitive Effects of Vertical Most-Favored-Nation Restraints and the Error of Amex

Posted by Social Science Research Network

The Anticompetitive Effects of Vertical Most-Favored-Nation Restraints and the Error of Amex

By Dennis W. Carlton (University of Chicago)

This paper illustrates the underlying economic logic behind the anticompetitive effects of what Ralph Winter and I have labeled vertical most favored nation restraints in Carlton and Winter (2018). Those are restraints in which one supplier tells a retailer that the retailer cannot set the retail price of its product higher than that of a rival, even if its wholesale price is higher than that of its rival. I explain the possible anti-competitive effect of such restraints. I then apply the reasoning to credit cards and finally, using the economic framework developed, explain the economic errors in the Court’s recent Amex decision.

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