Tacit Collusion with Low-Price Guarantees

Abstract

There is a large literature on the impact of price-matching and price-beating guarantees (low-price guarantees) on competition. Existing studies typically employ static models and the results are sensitive to modeling assumptions such as the type of guarantees, consumer hassle costs and consumer heterogeneity. In contrast, we employ a fully dynamic model and show that low-price guarantees robustly facilitate tacit collusion, by reducing a deviating firm's immediate deviation profit. This robustness of results in dynamic models, relative to the sensitivity of results in static models is due to the difference between equilibrium concepts in the two types of models. In a static model, any equilibrium has to be immune from incentive for any deviation, including infinitesimal deviation. In a dynamic model, however, one can ignore infinitesimal deviations since they lead to infinitesimal immediate gain but finite loss in ensuing punishments and firms never have incentive for such deviations.

Keywords: Low-price guarantee, Price-matching, Price-beating, Tacit collusion

JEL Classification: D43, L13