Buy Now and Match Later: The Impact of Posterior Price Matching on Profit with Strategic Consumers

50 Pages Posted: 19 Feb 2008 Last revised: 22 Sep 2011

See all articles by Guoming Lai

Guoming Lai

University of Texas at Austin - Red McCombs School of Business

Laurens Debo

Dartmouth College - Tuck School of Business

Katia Sycara

Carnegie Mellon University - School of Computer Science

Abstract

With a posterior price matching policy, a seller guarantees to reimburse the price difference to a consumer who buys a product before the seller marks it down. Such a policy has been widely adopted by retailers. We examine the impact of a posterior price matching policy on consumers' purchasing behavior, a seller's pricing and inventory decisions and their expected payoffs, assuming that the seller cannot credibly commit to a price path, but, can implement a posterior price matching policy. We find that the price matching policy eliminates strategic consumers' waiting incentive and thus allows the seller to increase price in the regular selling season. When the fraction of strategic consumers is not too small and their valuation decline over time is neither too low nor too high, the price matching policy can improve the seller's profit substantially as well as the inventory investment. In such situations, the strategic consumers' waiting incentive and the loss if they otherwise wait are both high. However, to adopt this policy, the seller also bears the refund cost. The seller has to either pay the refund that the consumers will claim or forgo the salvage value of any leftover inventory. The price matching policy can be detrimental when there are only a few strategic consumers present, or the strategic consumers' valuation decline is very low or very high. We find that the performance of this policy is insensitive to the proportion of consumers who claim the refund or to the correctness of the belief on the fraction of strategic consumers in the market. From the perspective of consumers, the price matching policy generally reduces consumer surplus, however, there are cases where consumer surplus can be also increased, typically when the variance of the potential high-end market volume is high. As a result, a Pareto improvement on both the seller's and the consumers' payoffs is possible. Finally, we find that the ability to credibly commit to a fixed price path is not very valuable when the seller can implement price matching.

Keywords: Posterior Price Matching, Strategic Consumer Behavior, Newsvendor, Rational Expectations Equilibrium

Suggested Citation

Lai, Guoming and Debo, Laurens and Sycara, Katia, Buy Now and Match Later: The Impact of Posterior Price Matching on Profit with Strategic Consumers. Available at SSRN: https://ssrn.com/abstract=1094562 or http://dx.doi.org/10.2139/ssrn.1094562

Guoming Lai (Contact Author)

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Laurens Debo

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Katia Sycara

Carnegie Mellon University - School of Computer Science ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213
United States

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