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THE EFFECT OF MOST-FAVORED CUSTOMER CLAUSES ON PRICES

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  • *We would like to thank the Editor and two anonymous referees, whose comments and suggestions have greatly improved this paper. We would also like to thank Rati Ram, Maria Arbatskaya, Lloyd Blackwell, Jeffrey Livingston, Thomas P. Lyon, Franco Mariuzzo, Catherine Mooney, Thomas Stratmann, George Waters and session participants at the 2006 Southern Economic Association Annual Conference and the 2007 International Industrial Organization Conference for their helpful comments and suggestions, and Jeffrey S. Racine for his help on R scripts. Wuyin Lin, Yan Zhou, Hojin Jung, Kelsey Beyers, Stephanie Holliman, and Zihui Ge provided excellent assistance in preparing the data for this study. Liu acknowledges a faculty fellowship and a Research Council grant from the University of Oklahoma. The usual caveat applies.

Abstract

We study the effects of introducing a Most-Favored Customer (MFC) clause on price competition among major consumer electronics retailers. Our data spans the periods before and after the introduction of an MFC clause by Best Buy, which occurred between April 1, 2003 and March 31, 2004. After controlling for various factors (including product life-cycle and seasonality effects), we find that, on average, Best Buy lowered its prices by 1.6% after introducing the MFC clause. Its competitors responded by cutting prices further: Buy.com by 3.5%, Circuit City by 2.2%, CompUSA by 3.2%, and Sears by 0.4%. We conclude that Best Buy's MFC adoption reduced prices.

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