Quantity Precommitment and Price Matching
AbstractWe revisit the question of whether price matching is anti-competitive in a capacity constrained duopoly setting. We show that the effect of price matching depends on capacity. Specifically, price matching has no effect when capacity is relatively low, but it benefits the firms when capacity is relatively high. Interestingly, when capacity is in an intermediate range, price matching benefits only the small firm but does not affect the large firm in any way. Therefore, one has to consider capacity seriously when evaluating if price matching is anti-competitive. If the firms choose their capacities simultaneously before pricing decisions, then the effect of price matching is either pro-competitive or ambiguous. We show that if the cost of capacity is high, then price matching can only (weakly) decrease the market price. On the other hand, if the cost of capacity is low, then the effect of price matching on the market price is ambiguous due to the multiplicity of equilibria. Therefore, this paper challenges the widely accepted belief that price matching is an anti-competititive practice if the firms choose their capacities simultaneously before pricing decisions.
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Bibliographic InfoPaper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2011-13.
Date of creation: 12 Sep 2011
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Price matching; capacity constraint; quantity precommitment;
Other versions of this item:
- L00 - Industrial Organization - - General - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-22 (All new papers)
- NEP-BEC-2011-09-22 (Business Economics)
- NEP-COM-2011-09-22 (Industrial Competition)
- NEP-IND-2011-09-22 (Industrial Organization)
- NEP-LAB-2011-09-22 (Labour Economics)
- NEP-REG-2011-09-22 (Regulation)
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