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Measuring the competition effects of price-matching guarantees

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  • Samir Mamadehussene

    (University of Texas at Dallas)

Abstract

The theoretical literature on price-matching guarantees (PMGs) finds that this policy has both a competition-softening and a competition-enhancing effect. Which effect dominates depends on market structure. This paper is the first to propose a structural framework to measure the impact of PMGs on market competition through a counterfactual analysis. The structural model proposed here can be estimated using price data alone. I estimate the model using data from the automotive tire market, and I find that the competition-softening effect is stronger than the competition-enhancing effect. PMGs keep transaction prices between 1% and 8% higher than they would be in the absence of such policy. PMGs exert the strongest effect on price-sensitive consumers, who tend to be the poorest. This consumer segment pays up to 10% higher prices in the presence of PMGs. The tire market has some unique features that facilitate the competition-enhancing effect of PMGs. Hence, that the competition-softening effect dominates even in the tire market suggests that PMGs may increase prices in many other markets, too.

Suggested Citation

  • Samir Mamadehussene, 2021. "Measuring the competition effects of price-matching guarantees," Quantitative Marketing and Economics (QME), Springer, vol. 19(3), pages 261-287, December.
    • Handle: RePEc:kap:qmktec:v:19:y:2021:i:3:d:10.1007_s11129-021-09242-1
    DOI: 10.1007/s11129-021-09242-1
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    More about this item

    Keywords

    Price-matching guarantees; Competition effects; Counterfactual analysis;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • M38 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Government Policy and Regulation

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