The Effects of Price-Matching Guarantees on Prices: Some Experimental Evidence

Abstract:     
This study reports experiments on two competing theories of price-matching guarantees (PMGs). The dominant view (Salop [1986]) in the literature suggests that PMGs can alter pricing incentives of firms and sustain anti-competitive outcome in the market. However, a recent theoretical extension (Hviid and Shaffer [1999]) argues that this anti-competitive outcome can be undermined if buyers incur costs in invoking these guarantees. Therefore, it is natural to wonder how these conclusions stand up empirically. In order to provide empirical evidence on the impact of PMGs on prices, we study a variety of stylized market models that capture the essence of the two theories, obtain testable predictions and lay out the design of the controlled experiment. Results indicate that in the absence of any hassle costs, PMGs can sustain the predicted collusive outcome. On the other hand, the presence of buyers who incur positive hassle costs significantly mitigates, though not fully as theory predicts, the price-facilitating power of PMGs. Our findings indicate that policy makers should heed the potentially anti-competitive effects of PMG related advertisements on prices.

Number of Pages in PDF File: 40

Keywords: Price-matching guarantees, collusion, competition, hassle cost, experiment

JEL Classification: L11, L12, C91

working papers series