Most Favored Nation (MFN) clauses are contractual provisions that were historically invoked between countries in treaties and trade agreements, promising, for example, that any lowering of tariffs on any trading partner would apply to all the most favored nations bound by the MFN agreement (hence the use of the term “nations”).1
However, more generally, MFNs can also apply to vertical agreements between suppliers and buyers, where, for example, a seller promises a buyer that the buyer will always be offered the lowest price offered by the seller.2 While the exact details of these provisions differ by contract, parties, and setting, MFN clauses generally require that one party to the transaction not offer better contractual terms to any other party.3
With the rise of technical platforms, an entity that facilitates interaction/transactions between one or more groups of users (e.g., consumers and suppliers),4 MFN clauses have made their way into agreements between platforms and platform participants. These are known as platform MFN (PMFN) clauses. Generally, PMFN clauses are imposed by the platforms on the sellers/suppliers and prohibit sellers/suppliers from offering buyers/consumers products or services more favorably (e.g. lower price, better offering) on any other platform or distribution channel.5 PMFNs can vary based on the reach of the provision. A “narrow PMFN” prevents a seller/supplier from offering more favorable products or services using its own distribution channel, while a “wide PMFN” extends this prohibition to all other platforms, in addition to the seller’s/supplier’s own distribution channel.6
A key difference between classic MFNs and PMFNs is that the platform is not purchasing a service or good from a seller/supplier; rather, the platform is paid a cut from sales that occur on the platform. Thus, rather than a traditional MFN restricting the price at which a supplier can sell to a buyer’s competitors, a PMFN puts a floor on the price the participants on the seller-/supplier-side of the platform can charge to the consumers through competing distribution sources.7 Given the nuances that distinguish PMFNs from MFNs, economists have added to the general MFN research with literature on PMFNs investigating both the potential procompetitive and potential anticompetitive impacts of those PMFNs.8
A concern for antitrust litigators and regulators is the potential for PMFNs to reduce price and/or product competition. A PMFN imposed by one platform may restrict a seller’s/supplier’s ability to lower the price (or vary products) to buyers/consumers on competing platforms. Without being able to offer lower consumer prices (or variation in products), platforms may struggle to differentiate themselves from a dominant platform in such a way as to compete effectively and attract enough consumers to survive and become a successful platform. Reduction in competition could then lead to higher platform fees and consumer prices.9 A PMFN may further reduce competition by lowering incentives for potential entrants to join the marketplace at all,10 which may also result in more concentrated markets.11
These antitrust concerns have piqued interest in PMFN policies in both litigation and regulation. A notable example is the regulation of PMFNs in the hotel booking space by France, Italy, and Sweden in April 2015, which led to Booking.com and Expedia (the two largest online travel agency platforms) to restrict “wide” price parity clauses within the E.U.12 Later, France prohibited all price parity clauses in for French hotels in July 2015, and Germany prohibited all price parity clauses—wide and narrow—for Booking.com in December 2015.13 As a key example of PMFN litigation, in 2021, a class action was brought against Amazon and the “Big Five” book publishers accusing them of colluding to fix the price of ebooks at artificially high rates using MFN clauses.14 This case closely mirrored a 2011 case against Apple and the Big Five publishers, in which the Big Five settled and Apple lost at trial and was ordered to pay $450 million.15
Given past litigation and enforcement related to PMFNs and the general increased scrutiny in the Big Tech space, we expect that PMFNs will continue or increase in being an area of antitrust interest. Further, the litigation and enforcement, along with the existing literature, relating to the potential impacts of PMFNs highlight the importance of rigorous economic analysis and sound expert economic testimony to provide cases with clear conclusions on which side of the competitive scale the PMFN falls.
1 Legal Information Institute Website, Most Favored Nation, https://www.law.cornell.edu/wex/most_favored_nation (accessed 1/11/2024). (“Most favored nation refers to a status conferred by a clause in which a country promises that it will treat another country as well as it treats any other country that receives preferential treatment. Most favored nation clauses are frequently included in bilateral investment treaties.”)
2 Baker, Jonathan B. and Judith A. Chevalier (2013), “The Competitive Consequences of Most-Favored-Nation Provisions,” Antitrust 27(2): 20–26, at 20. (“Under an MFN, one party to a transaction promises to give the other party at least as favorable contractual terms as it gives any other counterparty.”)
3 Baker, Jonathan B. and Judith A. Chevalier (2013), “The Competitive Consequences of Most-Favored-Nation Provisions,” Antitrust 27(2): 20–26, at 20. (“Under an MFN, one party to a transaction promises to give the other party at least as favorable contractual terms as it gives any other counterparty.”)
4 Parker, Geoffrey G., Marshall W. Van Alstyne, and Sangeet Paul Choudary (2016), Platform Revolution, New York, NY: W. W. Norton & Company, at 5. (“A platform is a business based on enabling value-creating interactions between external producers and consumers.”)
Hovenkamp, Herbert J. (2020), “Antitrust and Platform Monopoly,” Yale Law Journal 130: 1952–2273, at 1957.
5 Baker, Jonathan B. and Fiona Scott Morton (2018), “Antitrust Enforcement Against Platform MFNs,“ Yale Law Journal 127(7): 2176–2202, at 2716, 2178. (“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.”)
Boik, Andre, and Kenneth S. Corts (2016), “The Effects of Platform Most-Favored-Nation Clauses on Competition and Entry,” The Journal of Law and Economics 59(1): 105–134, at 105. (“In the context of sellers who sell their products through intermediary platforms, a platform most-favored-nation (PMFN) clause is a contractual restriction requiring that a particular seller will not sell at a lower price through a platform other than the one with which it has the PMFN agreement.”)
6 Baker, Jonathan B. and Fiona Scott Morton (2018), “Antitrust Enforcement Against Platform MFNs,“ Yale Law Journal 127(7): 2176–2202, at 2178. (“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.”)
7 Boik, Andre, and Kenneth S. Corts (2016), “The Effects of Platform Most-Favored-Nation Clauses on Competition and Entry,” The Journal of Law and Economics 59(1): 105–134, at 105, 108. (“In the context of sellers who sell their products through intermediary platforms, a platform most-favored-nation (PMFN) clause is a contractual restriction requiring that a particular seller will not sell at a lower price through a platform other than the one with which it has the PMFN agreement.”; “In a traditional MFN policy, one or more sellers commit to one or more buyers not to sell to other buyers at a lower price. . . . Note that a platform setting is quite different in several ways. Most notably, a PMFN clause is an agreement between a seller and a platform about prices charged by the seller to a third party–the buyer.”)
8 See, for example:
Johnson, Justin P. (2017), “The Agency Model and MFN Clauses,” The Review of Economic Studies, 84(300): 1151–1185, at 1151.
Boik, Andre and Kenneth S. Corts (2016), “The Effects of Most-Favored-Nation Clauses on Competition and Entry,” The Journal of Law and Economics 59(1): 105–134, at 112.
Wang, Chengsi and Julian Wright (2020), “Search Platforms: Showrooming and Price Parity Clauses,” RAND Journal of Economics, 51(1): 32–58, at 32.
9 Boik, Andre and Kenneth S. Corts (2016), “The Effects of Platform Most-Favored-Nation Clauses on Competition and Entry,” Journal of Law and Economics 59(1): 105–134, at 128. (“We show that PMFN agreements tend to raise fees charged by platforms and prices charged by sellers[.]”)
10 Boik, Andre and Kenneth S. Corts (2016), “The Effects of Platform Most-Favored-Nation Clauses on Competition and Entry,” Journal of Law and Economics 59(1): 105–134, at 128. (“We also show that the adoption of a PMFN agreement by an incumbent platform can discourage entry by another platform if it is sufficiently downward differentiated[.]”)
11 See for example:
Rogerson, William P. and Howard Shelanski (2020), “Antitrust Enforcement, Regulation, and Digital Platforms,” University of Pennsylvania Law Review 168: 1911–1940, at 1938. (“The second type of behavior is the use of most favored nation clauses (MFN) that make it more difficult for potential competitors to challenge the dominant provider. For example, in the case of platforms that help businesses reach customers (such as a travel site that lists hotel accommodations), a MFN by a dominant platform that prohibits businesses from offering better terms on other platforms can limit the ability of potential competitors to challenge the incumbent.”)
Ezrachi, Ariel (2015), “The Competitive Effects of Parity Clauses on Online Commerce,” European Competition Journal, 11(2–3): 488–519, at 501, 519. (“The anticompetitive effects described above have been central to the analysis of wide MFNs worldwide. Indeed, a review of the main decisions by competition agencies reveals a consensus as to the possible harmful effects which wide MFNs combined with an agency model may generate. The most publicised case which involved wide MFNs, and was pursued on both sides of the Atlantic, concerned Apple’s use of wide parity in its iBooks Store.” Price parity clauses “may lead to a restriction of competition through excessive intermediation and price uniformity and they may also limit low cost entry.”)
12 Ennis, Sean, Marc Ivaldi, and Vincente Lagos (2022), “Price Parity Clauses for Hotel Room Booking: Empirical Evidence from Regulatory Change,” Toulouse School of Economics Working Paper, available at: https://www.tse-fr.eu/sites/default/files/TSE/documents/doc/wp/2020/wp_tse_1106.pdf, at 7–8.
13 Ennis, Sean, Marc Ivaldi, and Vincente Lagos (2022), “Price Parity Clauses for Hotel Room Booking: Empirical Evidence from Regulatory Change,” Toulouse School of Economics Working Paper, available at: https://www.tse-fr.eu/sites/default/files/TSE/documents/doc/wp/2020/wp_tse_1106.pdf, at 7–8.
14 The Guardian, “Amazon.com and ‘Big Five’ Publishers Accused of eBook Price-Fixing,” 1/15/2021, https://www.theguardian.com/books/2021/jan/15/amazoncom-and-big-five-publishers-accused-of-ebook-price-fixing.
15 The Guardian, “Amazon.com and ‘Big Five’ Publishers Accused of eBook Price-Fixing,” 1/15/2021, https://www.theguardian.com/books/2021/jan/15/amazoncom-and-big-five-publishers-accused-of-ebook-price-fixing.