Most-favored-customer pricing, product variety, and welfare

Most-favored-customer (MFC) clauses are usually seen as anticompetitive co-ordination devices that firms adopt for the purpose of higher prices. Here, I examine the welfare impact of MFC clauses under endogenous product variety. Product variety is relevant because prospective higher prices from MFC clauses can be anticipated by multi-product firms in their provision of product lines. Under such circumstances, I find that these clauses can be socially harmful, but this is not always the case: they tend to be socially neutral for relatively large fixed costs of product-line assortment, harmful for intermediate costs, and beneficial for relatively small costs. •Previous results suggest most-favored-customer (MFC) clauses as anticompetitive.•The welfare impact of MFC clauses is examined under endogenous product-line assortment.•It is shown that MFC clauses can reduce welfare, but they can increase it sometimes.