Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 5

Some manufacturers that contract with the United States government have most favored nation clauses in their contracts. This provision makes the firm sell to the government at the lowest price it charges to any other customer. On the surface this provision seems to be advantageous to the government because it assures them the lowest price charged to any customer. Others argue, however, that the clause gives manufacturers more power in bargaining with other buyers. Explain how this increased bargaining power might occur.