Antitrust Enforcement Against Platform MFNs.

Author:Baker, Jonathan B.
Position:Most favored nations - Symposium: Unlocking Antitrust Enforcement


During the past two decades, antitrust enforcement against most favored nations (MFN) provisions has grown in the United States and Europe. U.S. government enforcers have brought cases in healthcare, digital goods, and payment systems, while European agencies have launched a series of challenges to MFNs imposed by online platforms. (1)

Given that consumers increasingly use online platforms to purchase goods and services, (2) it is important to analyze their competitive issues. In contrast to European challenges to platform MFNs, there have been almost no such government enforcement actions against platform MFNs in the United States. This Feature will explain the necessity of U.S. antitrust enforcement against platform MFNs for protecting competition in these important online markets.

Many of the online platform MFN provisions--also termed price parity provisions--investigated in Europe have been imposed on hotels by leading online travel agents (OTAs), such as and Expedia. The challenged provisions typically prevent hotels from offering rooms on other websites at prices below those charged on the OTA. While these provisions likely violate U.S. antitrust laws, they have drawn only limited scrutiny (3)

This Feature relies on this setting to illustrate the need for more vigorous antitrust enforcement in this platform context, in which the producer or service provider sets the final retail price. In exchange, the platform charges the producer or service provider a fee for distribution. This fee is often a commission set as a percentage of the final retail price. The arrangement whereby the platform does not take ownership of the good (e.g., the hotel room) but sells it on behalf of the vendor at a price chosen by the vendor is termed an agency distribution model. (4) Providers commonly offer their products or services on multiple online platforms. For example, a hotel may make rooms available on, Expedia, and the hotel's own site. A computer manufacturer may offer its product line through its own site, eBay, and Amazon Marketplace. Online platforms for hotel and transportation bookings, consumer goods, digital goods, and handmade craft products are often similarly organized.

A platform MFN requires that providers refrain from offering their products or services at lower prices on other platforms. The platform is thus guaranteed that no other internet distributor will charge a lower final price, not because the focal platform has worked to ensure that it has the lowest cost, but rather because it has contracted for competitors' prices to be no lower. Platform MFNs are labeled "wide" if they constrain the price on all other platforms, including the provider's own website (if any). In contrast, platform MFNs are considered "narrow" if they prevent the provider from setting a lower price on its own website, while leaving prices on other platforms unrestricted. If a platform with an MFN spots a lower price on another platform, it lowers its price to match. In a market in which most platforms employ wide MFNs with most providers, providers will generally need to set an identical price on all platforms. (5) The provider may agree to the MFN because it has few practical alternatives given the online platform's market power, or because the weakened price competition also benefits the provider. The higher profits that result from higher product prices need not all accrue to the platform. They can be divided between the platform and the vendors.

Part I of our Feature shows how platform MFN contracts can harm competition and consumers, despite their potential competitive benefits. Our economic analysis draws on the economics literature on the effects of MFNs generally, and platform MFNs in particular. We conclude that platform MFNs generally harm competition, except in narrow circumstances in which freeriding concerns are especially strong. Part II reviews how and why platform MFNs have been treated differently in U.S. and European competition law. Finally, Part III argues that U.S. antitrust enforcers should follow the lead of their European colleagues in investigating platform MFNs before explaining how a case against platform MFNs could be structured to fit within existing U.S. precedents.


    This Part describes the competitive effects of simple MFN provisions, before turning to platform MFNs, the central focus of this Feature. Like platform MFNs, simple MFNs commit sellers not to discount selectively. We begin with simple MFNs because they are familiar from the economics literature and case law and raise analogous competitive issues.

    1. Competitive Problems of MFN Provisions 1. Simple MFNs

      A simple MFN promises the covered buyer that it will be charged the lowest price offered by the seller. At first blush, one might expect this provision to lead to a lower price for the covered buyer. However, as explained throughout the economics literature, there are compelling theoretical reasons to expect equilibrium prices to rise due to the MFN. (6) The empirical evidence supports this prediction. (7) Below, we provide intuitions from this literature.

      Some anticompetitive problems created by MFNs are "collusive"--they weaken price competition. (8) The term "collusive" includes both coordinated conduct and unilateral accommodating conduct that softens competition. To understand how simple MFNs raise prices, consider the seller's incentives. An MFN creates a strong financial incentive for the seller not to offer low prices because any discount must be offered to all covered buyers. That penalty makes discounts offered to buyers expensive. By making it costly for firms to offer their customers selective (and, in some cases, confidential) discounts, an MFN may reduce those discounts, soften price competition, and lead to higher prices. (9)

      An MFN can alternatively or additionally facilitate coordination, including tacit collusion, and thus lead to higher prices. (10) Simple MFNs likely facilitated coordination between General Electric and Westinghouse in the sale of electrical equipment, (11) and among DuPont and three other sellers of gasoline additives. (12) Coordination leads to higher prices when firms reach consensus on terms of coordination and prevent cheating, or when firms acting independently but in parallel respond to rivals' less competitive conduct by accommodating it (i.e., by competing less aggressively themselves). Consistent with the theory, the aforementioned MFNs discouraged discounting and stabilized prices in both the electrical equipment and gasoline additive markets. (13)

      Second, an MFN may create an exclusionary anticompetitive problem. (14) An MFN can raise the costs of current or potential competitors by negotiating lower prices from suppliers of critical inputs. For example, suppose an entrant wishes to gain customers by charging a lower price (perhaps because it has no established brand name or installed base). It can profitably sell at a low price by undertaking selective contracting with suppliers willing to offer a discount in exchange for more volume or other favorable terms. If those suppliers also supply the incumbent, however, an MFN imposed by the incumbent would require the supplier to charge the same price to the entrant. This parity undermines the entrant's business model by preventing it from making an attractive offer to customers. The symmetry that MFNs impose on the marketplace thus can prevent new competition that would lower prices.

      The Department of Justice's cases against Delta Dental and BCBS Michigan focused on this anticompetitive possibility. (15) The MFNs in those cases were imposed on health care providers by dominant health insurers. Those contractual provisions made it impossible for entering health insurers to employ selective contracting with health care providers to cut the price of the insurance they sold in competition with incumbent insurers. This made entry more difficult for a new rival whose competitive advantage was low prices and thereby permitted the dominant insurance providers to maintain high prices.

      1. Platform MFNs

      Platform MFNs differ from simple MFNs because they are agreements between sellers and platforms about the prices that sellers will charge buyers who purchase through rival platforms, not agreements between sellers and buyers about the prices that sellers will charge other buyers. The two types of MFNs nonetheless raise similar competitive concerns.

      For example, suppose that OTAs typically charge hotels a commission rate of 30%. If that rate is the product of coordination among OTAs, one of the OTAs might decide to compete more aggressively ("cheat") by charging a commission rate of 15% to hotels that agree to offer lower priced rooms. With or without coordination, moreover, an entering OTA may charge discounted commissions to hotels that offer rooms at a discounted rate, in order to break into the market. Regardless of whether the OTA is cheating or entering, the OTA can profit if it attracts a significant number of travelers seeking discount hotel bookings. Hotels listing through the OTA may also profit. A hotel may earn more per booking after the commission is subtracted, or profit from the increased bookings. (16)

      A platform MFN imposed by an incumbent OTA could prevent these outbreaks of competition. The MFN would require each hotel maldng rooms available on the incumbent's platform to set the same price on a rival's or entrant's platform. This parity may undermine the discount OTA's business model by preventing it from making attractive offers to hotels (suppliers) and travelers (customers). The MFN may prevent cheating that would undermine OTA coordination and exclude entrants that would reduce supracompetitive commission rates adopted by a dominant OTA or achieved by an OTA oligopoly with market power.

      In anticipation of our later discussion of antitrust enforcement...

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