The Effects of Price Restrictions on Competition Between National and Local Firms

I present a game-theoretic model of competition between a national firm and local firms in which the introduction of most-favored-customer clauses into the sales contracts of the national firm decreases all industry prices. The reason is that the price restriction makes the national firm a weak price competitor in each local market. This produces a prisoners' dilemma situation in which each local firm has the unilateral incentive to be more aggressive in nonprice decisions. This increase in nonprice competition by all local firms causes prices to fall across the industry.