Without MFNs, Platforms Turn to Other Strategies to Guard Against Free Riding
TL;DR
Background: Online retail and travel platforms compete to attract shoppers by building a reputation for low prices and high quality. This is typically achieved through a variety of means, which traditionally have included most-favored-nation (MFN) clauses. Using MFNs, platforms like Amazon or Booking.com contractually prevent sellers from offering lower prices on competing marketplaces. These provisions helped platforms to protect their investments in customer acquisition, quality control, and trust-building by ensuring rivals couldn’t free-ride on these efforts.
But… Competition regulators around the world have increasingly taken issue with these clauses. The EU’s Digital Markets Act (DMA), for instance, bars so-called gatekeepers from imposing MFN clauses, viewing them as anti-competitive restrictions on seller freedom. And legislation in many European member states imposes similar requirements to all online platforms.
However… Platforms have experimented with other ways of protecting their reputation. Germany’s Bundeskartellamt (BKA) case against Amazon shows this evolution: instead of comparing seller prices across platforms, which is now illegal, Amazon benchmarks against industrywide pricing. By banning these transparent contracts, the BKA makes it increasingly difficult for platforms to offer compelling goods and services without running afoul of EU rules and national enforcement. In turn, this has important ramifications for how platforms govern their ecosystems, prompting them to turn to increasingly opaque and potentially restrictive alternatives.
KEY TAKEAWAYS
The Economics of Platform Reputation
Today’s digital platforms face a classic economic challenge. To succeed, they must invest billions in creating trusted marketplaces—building logistics networks, fighting fraud, handling customer service, and establishing reputations for fair prices. These investments reduce search costs for consumers and create value for sellers through increased traffic and conversion rates.
Without mechanisms to protect these investments, both sellers and rival platforms can free-ride. Sellers benefit from a platform’s customer base and trust, while offering better deals elsewhere. Competing platforms capitalize on this by offering lower fees, avoiding the need to make their own costly investments in market-making infrastructure. Consumers might do product research on Platform A but buy on Platform B—using the first platform’s investments, while denying it revenue.
MFN clauses have long been one market solution to this problem. They align incentives: platforms invest in quality knowing they could capture returns, while sellers gain access to valuable customer bases. Despite mixed evidence on their welfare effects (see ICLE’s upcoming literature review on the topic), the DMA and national legislation in many European states have banned such clauses.
But banning MFNs doesn’t eliminate the underlying economic problem. Instead, it forces platforms to opt for potentially inferior solutions.
The Move to Market Benchmarking
The German BKA case illustrates Amazon’s post-MFN strategy. Instead of contractually restricting sellers’ pricing decisions on other platforms, Amazon uses algorithms to determine whether prices on its platform align with broader market expectations. The system identifies three categories: “pricing errors,” which are removed entirely; “significantly high prices,” which lose Buy Box eligibility; and “uncompetitive prices” (which are subject to restricted visibility).
Crucially, these determinations aren’t based on whether a specific seller offers lower prices elsewhere—that would constitute an MFN clause. Instead, Amazon benchmarks against the entire industry. If widgets typically sell for $10-15 across all online retail outlets, a seller pricing at $20 on Amazon might lose their access to the Buy Box, regardless of their prices on other platforms or even whether they sell elsewhere.
This approach maintains Amazon’s reputation for competitive prices, while technically complying with MFN prohibitions. It does, however, represent a shift from bilateral governance (agreements between Amazon and individual sellers) to unilateral market-making (Amazon deciding what constitutes a “fair” market price).
When Solutions Become Problems
With its Amazon decision, the BKA creates more problems than it solves. The German competition authority simultaneously worries that Amazon’s mechanisms might force sellers to price below cost (driving them from the marketplace), while also claiming that Amazon might raise marketplace prices by matching the lowest prices found elsewhere. These contradictory concerns reveal the conceptual confusion: regulators haven’t clearly articulated what competitive harm they’re trying to prevent.
The regulatory chaos surrounding these mechanisms further illustrates the problem. Amazon’s Buy Box design was approved by the European Commission in 2022 as part of commitments to address self-preferencing concerns. Yet German authorities are now challenging related pricing mechanisms under national law. This fragmentation—where platforms can comply with all EU rules yet face contradictory national enforcement—shows what happens when regulators ban specific practices without addressing underlying economic realities. Each jurisdiction interprets the “solution” differently, creating compliance nightmares that the DMA was specifically designed to prevent.
More fundamentally, the transition from MFN clauses to algorithmic price monitoring reveals an uncomfortable truth about platform regulation: economic incentives are stubborn. When regulators ban specific contractual tools without providing viable alternatives for legitimate business needs, markets don’t simply accept the void—they fill it with whatever mechanisms remain available.
Today’s price benchmarking algorithms may be tomorrow’s prohibited practice (as Germany is trying to make it), prompting yet another evolution toward even less transparent mechanisms. This cycle wastes resources, creates legal uncertainty, and may ultimately produce market outcomes worse than those the original MFN clauses created.
For more on this issue, see the International Center for Law & Economics forthcoming white paper on MFN clauses.