Thursday, September 26, 2013
Joshua Gans (University of Toronto) discusses Most Favored Nation Clauses Moving Out of Favor.
ABSTRACT: "We will match our competitor's price!" sounds like the most competitive of slogans. And to a consumer who has just found out that there is another store with a lower price, it looks like opportunity. Unfortunately, this is one of those deals that is not as simple as it sounds. After all, why was it that, until a rival with a lower price was discovered by some consumer, the price was high? Could it be to catch the less savvy consumers out? Or would it ever be the case that you would be put in a position of having to comply with that promise? After all, your competitor does not gain from driving customers into your hands with their own lower price. That lower price is only valuable to them if they ensure your business. Otherwise they too may as well keep prices higher.
In broader business terms, price-matching guarantees have been given the name "most favored nation" clauses or MFNs. The origin of the name is in international trade negotiations where purchasing countries insisted on such clauses to profit from potential competition although, like my example above, these clauses did not necessarily produce that consequence. These days it is antitrust authorities who are taking a closer look at MFNs.
The reason for this new antitrust attention has to do with MFNs that are associated with platforms. While these fall under the general class of what former DOJ economist, Fiona Scott Morton, called "contracts that reference competitors" it is their association with platforms that leads to some difficult choices and trade-offs. This article will examine that association in more detail.