Most-favored-customer clause

Question

BlackTom AI · Accepted Answer

A most-favored-customer clause (MFN) guarantees that a seller will not offer a lower price or better terms to other buyers than it offers to the protected buyer. This parity commitment changes competitive incentives among downstream sellers and can affect market prices.

1) Relevant concepts:
- Price parity / MFN: contractual clause ensuring one buyer receives the best available terms.
- Competitive pricing incentives: in typical price competition (Bertrand-type), sellers undercut rivals to gain market share.
- Anticompetitive coordination: clauses that remove incentives to cut price can act like tacit collusion, raising equilibrium prices.

2) Step-by-step reasoning:
- Without an MFN, a retailer can discount to attract customers; competitors may match or undercut, driving prices down.
- With an MFN, the supplier promises the MFN buyer the lowest price available. If a rival retailer discounts below the MFN price, the supplier must extend that lower price to the MFN buyer or face breach.
- Anticipating this, suppliers and retailers avoid deep discounting because any discount immediately benefits the MFN buyer and reduces supplier margin across accounts.
- Therefore, the competitive pressure to lower prices is weakened: retailers cannot profit from undercutting without forcing the supplier to lower prices for the MFN buyer, so discounts are less likely.
- The practical effect is upward pressure on market prices and protected profit margins.

3) Calculations: none required; reasoning is qualitative economic logic.

4) Why the correct answer is correct:
Because MFNs remove or blunt the incentive for rival retailers to offer lower prices (discounting becomes self-defeating), they help maintain higher prices across the market.

5) Why other options are incorrect:
- "shall not be used because it involves favoritism." MFNs are not merely favoritism; they enforce parity and may be used for various commercial reasons.
- "is illegal." MFNs are not per se illegal everywhere; legality depends on jurisdiction and context (sometimes challenged under antitrust law), so this blanket statement is false.
- "lowers profits." MFNs typically protect suppliers’ margins and can increase retailer profits by sustaining higher prices, not lower them.

6) Conclusion:
Therefore, the correct choice is: helps keep prices high in the market. This matches the provided answer.

Most-favored-customer clause单项选择题

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