Platform most-favored-customer clauses and investment incentives

This paper examines the effects of platform most-favored-customer (PMFC) clauses on incentives for platforms to invest in demand-enhancing investments that might involve spillover effects. In a bilateral duopoly model incorporating competition between sellers and between platforms, we show that the industry-wide adoption of PMFC clauses raises the platforms' investment level and the resulting retail price if the substitution between platforms is large compared to the substitution between sellers. Additionally, we assess the respective effects of PMFC clauses on the demand, profit of sellers, profit of platforms, consumer surplus, and social welfare. The results suggest a possible conflict between platforms and competition authorities. (C) 2020 Elsevier B.V. All rights reserved.