Most-Favoured-Customer Clause

From Wikipedia, the free encyclopedia
Jump to navigation Jump to search

A Most-Favoured-Customer Clause (MFC) is a contractual arrangement between vendor and customer that guarantees the customer the best price the vendor gives to anyone. The MFC prevents a company from treating different customers differently in negotiations.

For example, on July 20, 2011, American Airlines announced an order for 460 narrowbody jets including 260 Airbus A320s.[1] The order broke Boeing's monopoly with the airline and forced Boeing into the re-engined 737 MAX.[2] As this sale included a "most favoured customer clause", the European airframer has to refund any difference to American if it sells to another airline at a lower price, so Airbus can't give a competitive price to competitor United Airlines, leaving it with a Boeing-skewed fleet.[3]

Big box retailers such as Wal-Mart and Costco often use their monopoly power to demand MFC from their suppliers. In one anecdote recalled by Costco CEO Jim Sinegal, a frozen-food supplier to both Wal-Mart and Costco accidentally sent Wal-Mart's invoice to Costco by mistake, and as the invoice revealed that Wal-Mart received lower pricing on the same goods, Costco immediately terminated its relationship with that supplier.[4][5]

Seller’s Perspective[edit]

Pros[edit]

  • Makes you a tougher negotiator
  • Reduces your customers’ incentive to bargain

Cons[edit]

  • Makes it easier for a rival to target one of your customers
  • Makes it harder for you to target one of your rival’s customers

Customer’s Perspective[edit]

Pros[edit]

  • Allows you to benefit from any better deal subsequently offered to other customers
  • Ensures that you’re not at a cost disadvantage relative to rivals
  • Eliminates the risk of looking bad if other customers strike better deals

Cons[edit]

  • When others have MFCs, it’s harder for you to get a “special” deal.
  • A most-favored-customer-clause facilitates (tacit) collusion.

Evaluation under Competition law in EU and US[edit]

While it may appear that MFCs benefit consumers because prices are lowered, views have changed in recent years (starting approx 2012). Authorities increasingly argue that such clauses prevent the offer of lower prices elsewhere and make the market entry of competitive offers considerably more difficult because they prevent new offers from offering products at lower prices. It thus violates competition.[6][7][8]

References[edit]