26 Pages Posted: 10 Jun 2011 Last revised: 13 May 2013
Date Written: May 10, 2013
This paper investigates the roles of price-matching guarantee as a response to `showrooming' (quality free-riding) and as a tool for predation. Employing a duopoly vertical differentiation model, we find that price-matching guarantee raises consumer surplus but its impact on social surplus is ambiguous. We identify two effects of price-matching guarantee on firms' profits. The change of sales effect improves the high quality firm's profit at the cost of its low quality rival while the intensified competition effect reduces both firms' profits. When the level of quality free-riding is sufficiently high, the change of sales effect dominates and price-matching guarantee raises the high quality firm's profit. On the other hand, when the level of quality free-riding is low, a price-matching guarantee lowers both firms' profits, suggesting a possible anti-trust rationale if adopted. That is, the high quality firm adopts a price-matching guarantee to drive the low quality firm out of market (predation through price-matching).
Keywords: Showrooming; Quality free-riding, Predation through price-matching
JEL Classification: D43, L13, M31
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