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Competitive Price-Matching Guarantees: Equilibrium Analysis of the Availability Verification Clause Under Demand Uncertainty

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  • Arcan Nalca

    (School of Business, Queen's University, Kingston, Ontario K7L 3N6, Canada)

  • Tamer Boyaci

    (Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada)

  • Saibal Ray

    (Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada)

Abstract

Price-matching guarantees involve a retailer matching the lower price of a competitor for an identical product. In reality, retailers often make such guarantees contingent on the verification of product availability at the competitor's location, and decline a price-match request if the product is not available there. This creates certain consternation on the part of customers. In this paper, we investigate the availability contingency strategy from the perspectives of both the retailers and the customers. Our analysis shows that availability contingency clauses intensify inventory competition between retailers and reinstitutes price competition, which is otherwise eliminated by unconditional price-matching guarantees. Consequently, despite what customers may think about the availability verification, it actually increases their surplus. On the other hand, such a clause reduces profits and, hence, is not the equilibrium strategy for retailers. Subsequently, we discuss how a likely customer behaviour pattern may be a plausible explanation regarding the use of the clause by the retailers in practice. This paper was accepted by Yossi Aviv, operations management.

Suggested Citation

  • Arcan Nalca & Tamer Boyaci & Saibal Ray, 2013. "Competitive Price-Matching Guarantees: Equilibrium Analysis of the Availability Verification Clause Under Demand Uncertainty," Management Science, INFORMS, vol. 59(4), pages 971-986, April.
    • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:4:p:971-986
    DOI: 10.1287/mnsc.1120.1622
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    References listed on IDEAS

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    Cited by:

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