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'Showrooming' and Price-Matching Guarantee

26 Pages Posted: 10 Jun 2011 Last revised: 13 May 2013

Qihong Liu

University of Oklahoma - Department of Economics

Date Written: May 10, 2013

Abstract

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

Suggested Citation

Liu, Qihong, 'Showrooming' and Price-Matching Guarantee (May 10, 2013). Available at SSRN: https://ssrn.com/abstract=1862181 or http://dx.doi.org/10.2139/ssrn.1862181

Qihong Liu (Contact Author)

University of Oklahoma - Department of Economics ( email )

Norman, OK 73019-2103
United States
405-325-5846 (Phone)

HOME PAGE: http://qliu.oucreate.com

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