Screening loss-averse buyers through best-price provisions

We consider a monopolist who is facing loss-averse and loss-neutral buyers over two periods, with an uncertainty about the type of buyers. Monopolist announces its price today, while the price tomorrow can be high or low, which is exogenous. Monopolist aims to screen loss-averse buyers using most-favored-customer (MFC) clause by offering two contracts, one with MFC, and the other without MFC, with different prices, such that loss-averse buyers self-select the former, while loss-neutral ones choose the latter. First, we identify when the incentive problem is an issue, so that for a parameter subspace, the first-best prices are incentive compatible while for the rest of the parameter space they are not. Then, we characterize the second-best prices for patient buyers and show that the price attached to the contract with an MFC clause is higher than the price without an MFC clause. This resembles those pricing strategies for airline tickets and hotel stays, where usually a flexible (free cancellation or free rescheduling) version is offered at a higher price.