Price Matching and Edgeworth Cycles

Abstract

With price matching policies, retailers offer consumers to match prices offered by cheaper competitors. This article investigates how price matching affects pricing decisions in dynamic markets with cycling prices. The model predicts price-matching retailers to post higher prices and to lead price restorations. The lower bound of price undercutting increases for price-consulted retailers. Consulted stations also anticipate earlier price restoration reactions from implementing stations and, thus, provoke restorations by executing more price decreases earlier. The last effect dominates in welfare calculations, such that price matching has positive welfare implications. The predictions are verified with price data on the German gasoline retail market. Making use of the discontinuity of two policies, I disentangle the competitive effects on implementing and price-consulted market participants. In line with the model, a price-matching retailer increases his promotional prices significantly with the introduction of price matching.

Keywords: Low-price guarantees; Dynamic pricing; Retail gasoline

JEL Classification: L11; L71; L81