More Game Theory in the Business World

Oftentimes, a particular business strategy has an effect that was not predicted. However, with a careful analysis of the marketplace, taking into account the motives of all the players, the picture becomes more clear.

Again for my entry today, I will be calling on game theory and from material from the book Co-opetition . This time for a quick wisdom on how to use the "Most-favored-customer clause"(MFC) and the "Meet-the-competition clause"(MCC).

MFC is a deal that guarantees the lowest price to a customer (buyer). In the event that another buyer is able to negotiate a lower deal, the MFC buyer is able to get this same deal.

This seems like a strong position to be in for the buyer. However, the end result of this is that the seller will get a better price from everyone. The reason is that the seller becomes a much stricter negotiater, and the buyer becomes much more relaxed.

The seller in this case will be especially worried about having match the price for the favored buyer. As a result, they will become a very shrewd negotiator, pushing for the highest price that is absolutely possible with any buyers.

The favored buyer, however, will become more relaxed, because they can count on another buyer to negotiate the best price. The end result is probably a higher price than what would have been negotiated otherwise.

The one key advantage of the MFC clause is that they favored buyer will never be at a price disadvantage. For the supply of a critical material, this could really be the only thing that the buyer is after.

The MCC clause, also known as the 'last-look' clause ensures that a preferred seller will always have the right to match the lowest bid that another seller offers. This would seem again to be a very favorable position for a buyer. Whenever a low bid is negotiated with a seller, the buyer will always have a chance to make it even lower, if the MCC seller wants to win the contract.

The surprising result that can occur in this case, however, is that the number and quality of bids will be decreased. Sellers that would have otherwise made bids, will now opt out. The time and engery to create a bid that will always be matched, is not worth the effort.

So, the true result of the MFC and MCC contract clauses? In effect, a strong case can be made that what can seem like a buyers bonus is working as a sellers advantage. Both can lead to less competition, and inflated prices.