A Most-Favoured-Customer Clause 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 narrowbodyjets including 260Airbus A320s. The order broke Boeing's monopoly with the airline and forced Boeing into the re-engined 737 MAX. As this sale included a "most favoured customer clause", the Europeanairframer 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. 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.
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 collusion
While it may appear that MFCs benefit consumers because prices are lowered, views have changed in recent years. 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.
