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The Welfare Losses from Price Matching Policies

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  • Aaron S. Edlin

    (Department of Economics, University of California, Berkeley; National Bureau of Economic Research, Hoover Institution)

  • Eric R. Emch

    (Department of Economics, University of California, Berkeley)

Abstract

Several recent papers argue that price matching policies raise equilibrium prices. We add to this literature by considering potential welfare losses, which have two sources: Harberger triangles from high prices and Posner rectangles from over-entry. We compare markets with price matching and free entry to the traditional concerns of antitrust law, monopoly or cartel markets without entry. Price matching with entry leads to greater welfare losses than both monopoly and cartel in markets with a low ratio of fixed to marginal cost and low demand elasticity. We illustrate these general results using parameters from the wholesale gasoline and air travel markets, and relate our model to price matching on NASDAQ.

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Bibliographic Info

Paper provided by EconWPA in its series Law and Economics with number 9803001.

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Length: 38 pages
Date of creation: 12 Mar 1998
Date of revision: 26 May 1998
Handle: RePEc:wpa:wuwple:9803001

Note: 38 pages. LaTeX format (.dvi), Six figures are embedded in the text.
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References

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  1. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  2. Christie, William G & Harris, Jeffrey H & Schultz, Paul H, 1994. " Why Did NASDAQ Market Makers Stop Avoiding Odd-Eighth Quotes?," Journal of Finance, American Finance Association, vol. 49(5), pages 1841-60, December.
  3. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
  4. Corts, Kenneth S., 1995. "On the robustness of the argument that price-matching is anti-competitive," Economics Letters, Elsevier, vol. 47(3-4), pages 417-421, March.
  5. Severin Borenstein, 1991. "Selling Costs and Switching Costs: Explaining Retail Gasoline Margins," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 354-369, Autumn.
  6. Doyle, Christopher, 1988. "Different selling strategies in Bertrand oligopoly," Economics Letters, Elsevier, vol. 28(4), pages 387-390.
  7. Christie William G. & Huang Roger D., 1994. "Market Structures and Liquidity: A Transactions Data Study of Exchange Listings," Journal of Financial Intermediation, Elsevier, vol. 3(3), pages 300-326, June.
  8. Kandel, Eugene & Marx, Leslie M., 1997. "Nasdaq market structure and spread patterns," Journal of Financial Economics, Elsevier, vol. 45(1), pages 61-89, July.
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Cited by:
  1. Mago, Shakun Datta & Pate, Jennifer G., 2009. "An experimental examination of competitor-based price matching guarantees," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 342-360, May.
  2. Sridhar Moorthy & Ralph A. Winter, 2006. "Price‐matching guarantees," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 449-465, 06.
  3. F. Javier Casado-Izaga, 2000. "Welfare effects of price-matching policies in a differentiated product market," Investigaciones Economicas, Fundación SEPI, vol. 24(2), pages 487-498, May.
  4. Pio Baake & Ulrich Schwalbe, 2013. "Price Guarantees, Consumer Search, and Hassle Costs," Discussion Papers of DIW Berlin 1335, DIW Berlin, German Institute for Economic Research.
  5. Schwalbe, Ulrich & Baake, Pio, 2013. "Price Guarantees, Consumer Search, and Hassle Costs," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80023, Verein für Socialpolitik / German Economic Association.
  6. Enrique Fatas & Juan Mañez, 2007. "Are low-price promises collusion guarantees? An experimental test of price matching policies," Spanish Economic Review, Springer, vol. 9(1), pages 59-77, March.
  7. Kaplow, Louis & Shapiro, Carl, 2007. "Antitrust," Competition Policy Center, Working Paper Series qt9pt7p9bm, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  8. Raskovich, Alexander, 2007. "Retail buyer power through steering," Economics Letters, Elsevier, vol. 96(2), pages 221-225, August.
  9. Oliver Budzinski, 2009. "Modern Industrial Economics and Competition Policy: Open Problems and Possible Limits," Working Papers 93/09, University of Southern Denmark, Department of Environmental and Business Economics.
  10. Subhasish Dugar & Todd Sorensen, 2006. "Hassle Costs, Price-Matching Guarantees and Price Competition: An Experiment," Review of Industrial Organization, Springer, vol. 28(4), pages 359-378, June.

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