The Anticompetitive Potential of MFNs

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James Nieberding, Aug 22, 2014

Under competition, sellers independently set their prices and often engage in price discrimination by charging different buyers different prices for the same item. However, under a variety of price-protection programs, sellers commit to prices that may limit their pricing freedom by linking prices to some buyers to those charged to other buyers. While such price provisions are known by acronyms such as most-favored-nation provisions, most-favored-customer clauses, and meeting-competition clauses, they all have “price protection” or “price-matching” as a common feature.

For example, a typical MFN provides that a seller will give a buyer the lowest price the seller offers. This can be a promise to protect a buyer against the seller from lowering prices to other buyers or reducing prices in the future, or an assurance to match another seller’s lower price. For example, a “retroactive” policy might state that the seller will offer a buyer a refund if future buyers receive a lower price, the reduction being equal to the difference between the present and future prices. A “contemporaneous” policy might stipulate that the seller will offer a buyer the same low price offered to other buyers, effectively committing the seller not to price discriminate. While such provisions seem to epitomize price competition, promise lower prices, and have recognized pro-competitive aspects, they nonetheless have been the focus of antitrust scrutiny for their anticompetitive potential.

This article focuses on the potential anticompetitive aspects of MFNs. A standard price-setting duopoly model is presented to illustrate these concerns and to show that the introduction of an MFN leads to higher prices, reduced output, and increased profitability for all firms—even as they select their actions independently and without explicit coordination. Several antitrust cases are discussed where anticompetitive effects of MFNs were alleged to show that this aspect of MFNs is carefully considered by antitrust enforcers.