Wholesale Most-Favored-Nation Clauses and Price Discrimination with Negative Consumption Externalities: Equivalence Results

Abstract

Most-favored-nation (MFN) clauses in wholesale contracts have been the subject of recent controversy and renewed antitrust scrutiny. We demonstrate that an environment where MFN clauses may be adopted share equivalence properties with an environment where a monopolist sells a good exhibiting negative consumption externalities directly to consumers. The welfare effects closely follow those developed in the classic third degree price discrimination literature by Schmalensee (1981) and Varian (1985). We find that the welfare effects of wholesale MFNs are ambiguous for the same reasons the effects of uniform pricing on welfare are ambiguous in the textbook price discrimination problem.

Keywords: Most-Favored-Nation Clauses, Price Discrimination, Wholesale Contracts