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Are Low-Price Compromises Collusion Guarantees? An Experimental Test of Price Matching Policies

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Abstract

In a symmetric differentiated experimental duopoly we test the ability of Price Matching Guarantees (PMG) to rise prices above the competitive levels. PMG is introduced both as a market institution (the effective selling price is always the lowest posted price) and as a strategic choice so subjects have to decide whether or not to offer it. Our results show that PMG leads to a clear collusive outcome as markets quickly and fully converge to the collusive prediction if PM is imposed as a market institution. If subjects are allowed to decide whether to adopt PMG or not we observe that almost all subjects decide to adopt PMG and prices get very close to the collusive ones.

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Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2004/33.

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Length: 7 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:cea:doctra:e2004_33

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Keywords: price-matching guarantees; experimental economics;

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  1. Jeffrey Milyo & Joel Waldfogel, 1998. "The Effect of Price Advertising on Prices: Evidence in the Wake of 44 Liquormart," Discussion Papers Series, Department of Economics, Tufts University, Department of Economics, Tufts University 9807, Department of Economics, Tufts University.
  2. Dufwenberg, Martin & Gneezy, Uri, 2000. "Price competition and market concentration: an experimental study," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 18(1), pages 7-22, January.
  3. Arbatskaya, Maria, 2001. "Can low-price guarantees deter entry?," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 19(9), pages 1387-1406, November.
  4. Morten Hviid & Greg Shaffer, 1999. "Hassle Costs: The Achilles' Heel of Price-Matching Guarantees," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 8(4), pages 489-521, December.
  5. Garcia-Gallego, Aurora & Georgantzis, Nikolaos, 2001. "Multiproduct activity in an experimental differentiated oligopoly," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 19(3-4), pages 493-518, March.
  6. Corts, Kenneth S., 1995. "On the robustness of the argument that price-matching is anti-competitive," Economics Letters, Elsevier, Elsevier, vol. 47(3-4), pages 417-421, March.
  7. Hviid, M. & Shaffer, G., 1994. "Do Low-Price Guarantees Facilitate Collusion?," Papers, Michigan - Center for Research on Economic & Social Theory 94-01, Michigan - Center for Research on Economic & Social Theory.
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