Question

When most-favored-customer pricing is used in facilitate collusion, it can be detrimental to consumers. Are there possible benefits that MFC pricing can have for consumers? In answering this question, consider to types of consumers - those who buy a final good for personal consumption and those who buy an intermediate good to use as an input in the production of a final good.

Answer 1

Most favored customer (MFC) pricing reduces the scope of cheating and giving secret discounts to one customer, rather offering discount to all the customers. So, MFC pricing ensures that customers get the best price from the vendor or supplier. With the perspective of the institutional consumers who use goods as input, get stable pricing as a part of MFC pricing strategy that contributes to a stable & best price of the final product. It can develop a low price advantage of the final product in the market. So, MFC pricing helps institutional consumers. The most favored customer pricing prevents the scope of price discrimination towards the consumers who buy the product as final consumption. As a result, a consumer surplus is created for the consumers. Hence, it is also beneficial to the end consumers. Further the most favored customer pricing eliminates the bargaining between the seller and consumers. Hence, bargaining cost is saved due to the presence of most favored customer pricing.