Most-Favored-Customer Agreements


Most-Favored-Customer Agreements[16]

Your supplier could get smart and protect itself from chaos by adopting most-favored-customer agreements. Under these agreements you promise a customer that you will never sell to him for a price more than what you sell to any other customer for.

If a supplier gave all of his customers most-favored-customer status, it would be much harder for him to secretly lower his prices, because he would have to lower prices for all customers if he did so for just a few. He wouldn’t be able to offer lower prices to just those customers he was trying to steal from his rival. Furthermore, it’s much easier to determine if a firm is giving discounts to all its customers rather than if it is just cutting prices for some. When one supplier issues most-favored-customer agreements, therefore, its rival can have much more confidence that it is not being betrayed. So, even though most-favored-customer agreements sound like they favor customers, they can really help producers by reducing price competition.

[16]Brandenburger and Nalebuff (1996), 161–169.




Game Theory at Work(c) How to Use Game Theory to Outthink and Outmaneuver Your Competition
Game Theory at Work(c) How to Use Game Theory to Outthink and Outmaneuver Your Competition
ISBN: N/A
EAN: N/A
Year: 2005
Pages: 260

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