100% vs. 200% PRICE MATCHING GUARANTEES
pp.184-185
Firms, especially retailers try to attract consumers by convincing them that its price is lower than the competitors’ by offering price-matching guarantees (henceforth PMGs). Walmart has offered a price-matching guarantee for years, and Target and Best Buy have also introduced their own policies. Not only brick and mortar retailers but also online retailers such as e-Bay, Amazon use this policy. Recently, offline retailers decided to match prices against online retailers as well. Many studies have analyzed the effect of PMGs in the areas of economics and marketing. These studies focus on four effects: price collusion, price war, price discrimination and signaling. First, it has been claimed that guarantees facilitate price collusion by reducing the incentive to cut prices (Salop 1986; Hviid and Shaffer 1999). Meanwhile some authors argue that PMGs has not only anti-competitive but also pro-competitive effects (Cort 1996; Chen, Narasimhan and Zhang 2001). PMGs may be useful for a low-cost firm to signal low prices to uninformed consumers (Moorthy and Winter 2006; Moorthy and Zhang 2006). Finally, PMGs can be used as a means of price discrimination in the sense that firms charge different prices to each segment of consumers differentiated by their information about rivals’ prices (Png and Hirshleifer 1987). Usually firms pay just as much as the price difference, which is called 100% PMGs. However, there are several types of PMGs depending on the refund amount. For example, in case of 200% PMGs, a firm pays twice the price difference when the rival’s price is lower. I compare the effects of 100% vs. 200% PMGs using a two-stage game model where two identical firms decide whether to offer a PMGs in the first stage and prices in the second stage. First, whether or not to offer a PMGs depends on the number of loyal consumers relative to price-sensitive consumers. Both firms offer a 100% PMGs and charge a high price when the number is moderate. When it is large, neither firm offers a PMGs and when it is small, there are two asymmetric equilibria where one firm offers a PMGs. Firms enjoy the same or a higher profit by PMGs. Second, the difference between 100% and 200% PMGs occurs when the number of loyal consumers is small. When it is very small, neither firm offers a 200% PMGs, when it is moderately small, both firms offer a PMGs. Further, when the demand of price-sensitive consumers is price elastic, profits decrease by PMGs. Finally, when firms can choose between 100% and 200% PMGs, it is more likely that 100% PMGs will be chosen.