Download This PaperPlatform Most-Favored-Customer Clauses and Investment Incentives
38 Pages Posted: 16 Jan 2018 Last revised: 2 Apr 2020
Date Written: April 1, 2020
Abstract
This paper examines the effects of platform most-favored-customer (PMFC) clauses on incentives for platforms to invest in demand-enhancing investments that might involve spillover effects. In a bilateral duopoly model incorporating competition between sellers and between platforms, we show that the industry-wide adoption of PMFC clauses raises the platforms' investment level and the resulting retail price if the substitution between platforms is large compared to the substitution between sellers. Additionally, we assess the respective effects of PMFC clauses on the demand, profit of sellers, profit of platforms, consumer surplus, and social welfare. The results suggest a possible conflict between platforms and competition authorities.
Keywords: most-favored-customer clause, price parity clause, platform investment, spillover effect, vertical relation
JEL Classification: L42, K21, L13, L11, L14
Suggested Citation: Suggested Citation