Most-Favoured-Customer Clause

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

Pros

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

Cons

  • Makes it easier for a rival to target one of your customers
  • Makes it harder for you to target one of your rivals' customers

Customer's Perspective

Pros

  • 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

  • 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

While it may appear that MFCs benefit consumers because prices are lowered, views have changed in recent years (since approximately 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 entrants from offering products at lower prices. It thus violates competition.[6][7][8]

References

  1. ^ "AMR Corporation Announces Largest Aircraft Order in History With Boeing and Airbus" (Press release). American Airlines. July 20, 2011.
  2. ^ "American Orders 460 Narrow Jets from Boeing and Airbus". The New York Times. July 20, 2011.
  3. ^ Edward Russell (4 Oct 2017). "United goes airframer 'agnostic' on future orders". Flightglobal.
  4. ^ [1]
  5. ^ [2]
  6. ^ "Online hotel portal HRS's 'best price' clause violates competition law – Proceedings initiated against other hotel portals". Bundeskartellamt. 20 December 2013.
  7. ^ "Are price clauses providing the lowest price legal?". Horten Advokatpartnerselskab. 6 Aug 2014.
  8. ^ "Most Favoured Customer Clauses: Good, Bad or Indifferent?". Carson McDowell LLP. 25 October 2013.

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