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Hassle Costs: The Achilles' Heel of Price-Matching Guarantees

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  • Morten Hviid
  • Greg Shaffer

Abstract

We show that price-matching guarantees can facilitate monopoly pricing only if firms automatically match prices. If consumers must instead request refunds (thereby incurring hassle costs), we find that any increase in equilibrium prices due to firms' price-matching policies will be small; often, no price increase can be supported. In symmetric markets price-matching guarantees cannot support any rise in prices, even if hassle costs are arbitrarily small In asymmetric markets, higher prices can be supported, but the prices fall well short of maximizing joint profits. Our model can explain why some firms adopt price-matching guarantees while others do not. Copyright (c) 1999 Massachusetts Institute of Technology.

Suggested Citation

  • Morten Hviid & Greg Shaffer, 1999. "Hassle Costs: The Achilles' Heel of Price-Matching Guarantees," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(4), pages 489-521, December.
  • Handle: RePEc:bla:jemstr:v:8:y:1999:i:4:p:489-521
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    References listed on IDEAS

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    Cited by:

    1. Arbatskaya, Maria & Hviid, Morten & Shaffer, Greg, 2004. "On the Incidence and Variety of Low-Price Guarantees," Journal of Law and Economics, University of Chicago Press, vol. 47(1), pages 307-332, April.
    2. Koh, Dong-Hee & Moon, Junyean & Schellhase, Ralf, 2012. "Price-matching guarantees: Influences on pricing strategy in a market with asymmetric firms," Journal of Business Research, Elsevier, vol. 65(11), pages 1551-1557.
    3. Aaron M. Garvey & Simon J. Blanchard & Karen Page Winterich, 2017. "Turning unplanned overpayment into a status signal: how mentioning the price paid repairs satisfaction," Marketing Letters, Springer, vol. 28(1), pages 71-83, March.
    4. Subhasish Dugar & Todd Sorensen, 2006. "Hassle Costs, Price-Matching Guarantees and Price Competition: An Experiment," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 28(4), pages 359-378, June.
    5. Hoe Sang Chung & Min Kim, 2016. "Low-price guarantees and pricing behavior: evidence from hypermarkets in Korea," Economics Bulletin, AccessEcon, vol. 36(2), pages 1223-1229.
    6. Yuxin Chen & Chakravarthi Narasimhan & Z. John Zhang, 2001. "Consumer Heterogeneity and Competitive Price-Matching Guarantees," Marketing Science, INFORMS, pages 300-314.
    7. Arcan Nalca & Tamer Boyaci & Saibal Ray, 2010. "Competitive price-matching guarantees under imperfect store availability," Quantitative Marketing and Economics (QME), Springer, vol. 8(3), pages 275-300, September.
    8. Andreas Pollak, 2017. "Do Price-Matching Guarantees with Markups Facilitate Tacit Collusion? Theory and Experiment," Working Paper Series in Economics 93, University of Cologne, Department of Economics.
    9. Anne T. Coughlan & Greg Shaffer, 2009. "—Price-Matching Guarantees, Retail Competition, and Product-Line Assortment," Marketing Science, INFORMS, vol. 28(3), pages 580-588, 05-06.
    10. Janssen, Maarten C.W. & Parakhonyak, Alexei, 2013. "Price matching guarantees and consumer search," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 1-11.
    11. Enrique Fatas & Juan Mañez, 2007. "Are low-price promises collusion guarantees? An experimental test of price matching policies," Spanish Economic Review, Springer;Spanish Economic Association, vol. 9(1), pages 59-77, March.
    12. repec:kap:qmktec:v:15:y:2017:i:2:d:10.1007_s11129-017-9182-0 is not listed on IDEAS
    13. Enrique Fatás & Juan A. Mañez, 2004. "Are Low-Price Compromises Collusion Guarantees? An Experimental Test of Price Matching Policies," Economic Working Papers at Centro de Estudios Andaluces E2004/33, Centro de Estudios Andaluces.
    14. Sridhar Moorthy & Ralph A. Winter, 2006. "Price‐matching guarantees," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 449-465, June.
    15. Tumennasan, Norovsambuu, 2013. "Quantity precommitment and price-matching," Journal of Mathematical Economics, Elsevier, vol. 49(5), pages 375-388.
    16. Troncoso-Valverde Cristián, 2016. "Meet-the-competition clauses and the strategic disclosure of product quality," The B.E. Journal of Economic Analysis & Policy, De Gruyter, pages 1-5.
    17. Wen Mao, 2005. "Price-matching policy with imperfect information," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(6), pages 367-372.
    18. 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.
    19. 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.
    20. Ireland, Norman J, 2002. "Firms' Strategies For Reducing The Effectiveness Of Consumer Price Search," The Warwick Economics Research Paper Series (TWERPS) 627, University of Warwick, Department of Economics.
    21. Dobson, Paul W & Waterson, Michael, 2003. "Chain-Store Pricing For Strategic Accommodation," The Warwick Economics Research Paper Series (TWERPS) 677, University of Warwick, Department of Economics.
    22. Maria Arbatskaya, 2005. "Buy Now, Search Later: A Model of Low-Price Guarantees with Post-Purchase Search," Emory Economics 0520, Department of Economics, Emory University (Atlanta).
    23. Enrique Fatás & Nikolaos Georgantzís & Juan A. Máñez & Gerardo Sabater, 2013. "Experimental duopolies under price guarantees," Applied Economics, Taylor & Francis Journals, vol. 45(1), pages 15-35, January.
    24. Subhasish Dugar, 2007. "Price-Matching Guarantees and Equilibrium Selection in a Homogenous Product Market: An Experimental Study," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 30(2), pages 107-119, March.
    25. Morten Hviid & Greg Shaffer, 2012. "Optimal low-price guarantees with anchoring," Quantitative Marketing and Economics (QME), Springer, vol. 10(4), pages 393-417, December.

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