IDEAS home Printed from https://ideas.repec.org/a/kap/qmktec/v19y2021i3d10.1007_s11129-021-09242-1.html
   My bibliography  Save this article

Measuring the competition effects of price-matching guarantees

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11129-021-09242-1
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11129-021-09242-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    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. Zhiqi Chen, 1995. "How Low Is a Guaranteed-Lowest-Price?," Canadian Journal of Economics, Canadian Economics Association, vol. 28(3), pages 683-701, August.
    3. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
    4. Karen Clay & Ramayya Krishnan & Eric Wolff, 2001. "Prices and Price Dispersion on the Web: Evidence from the Online Book Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 49(4), pages 521-539, December.
    5. Baye, Michael R. & Kovenock, Dan, 1994. "How to sell a pickup truck : 'Beat-or-pay' advertisements as facilitating devices," International Journal of Industrial Organization, Elsevier, vol. 12(1), pages 21-33, March.
    6. Qiang Lu & Sridhar Moorthy, 2007. "Coupons Versus Rebates," Marketing Science, INFORMS, vol. 26(1), pages 67-82, 01-02.
    7. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
    8. Victor Aguirregabiria, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(2), pages 275-308.
    9. Greg Kaplan & Guido Menzio & Leena Rudanko & Nicholas Trachter, 2019. "Relative Price Dispersion: Evidence and Theory," American Economic Journal: Microeconomics, American Economic Association, vol. 11(3), pages 68-124, August.
    10. Matthijs R. Wildenbeest, 2011. "An empirical model of search with vertically differentiated products," RAND Journal of Economics, RAND Corporation, vol. 42(4), pages 729-757, December.
    11. Png, I P L & Hirshleifer, D, 1987. "Price Discrimination through Offers to Match Price," The Journal of Business, University of Chicago Press, vol. 60(3), pages 365-383, July.
    12. Doyle, Christopher, 1988. "Different selling strategies in Bertrand oligopoly," Economics Letters, Elsevier, vol. 28(4), pages 387-390.
    13. Ganesh Iyer, 1998. "Coordinating Channels Under Price and Nonprice Competition," Marketing Science, INFORMS, vol. 17(4), pages 338-355.
    14. Gordon Phillips & Giorgo Sertsios, 2013. "How Do Firm Financial Conditions Affect Product Quality and Pricing?," Management Science, INFORMS, vol. 59(8), pages 1764-1782, August.
    15. Saul Lach, 2002. "Existence And Persistence Of Price Dispersion: An Empirical Analysis," The Review of Economics and Statistics, MIT Press, vol. 84(3), pages 433-444, August.
    16. Arbatskaya, Maria & Hviid, Morten & Shaffer, Greg, 2006. "On the use of low-price guarantees to discourage price cutting," International Journal of Industrial Organization, Elsevier, vol. 24(6), pages 1139-1156, November.
    17. Philip J. Reny, 1999. "On the Existence of Pure and Mixed Strategy Nash Equilibria in Discontinuous Games," Econometrica, Econometric Society, vol. 67(5), pages 1029-1056, September.
    18. Erik Brynjolfsson & Michael D. Smith, 2000. "Frictionless Commerce? A Comparison of Internet and Conventional Retailers," Management Science, INFORMS, vol. 46(4), pages 563-585, April.
    19. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-449, October.
    20. 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.
    21. Sridhar Moorthy & Ralph A. Winter, 2006. "Price‐matching guarantees," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 449-465, June.
    22. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    23. Daniel A. Ackerberg & Gautam Gowrisankaran, 2006. "Quantifying equilibrium network externalities in the ACH banking industry," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 738-761, September.
    24. Jean-Francois Houde, 2012. "Spatial Differentiation and Vertical Mergers in Retail Markets for Gasoline," American Economic Review, American Economic Association, vol. 102(5), pages 2147-2182, August.
    25. Logan, John W. & Lutter, Randall W., 1989. "Guaranteed lowest prices: do they facilitate collusion?," Economics Letters, Elsevier, vol. 31(2), pages 189-192, December.
    26. Chakravarthi Narasimhan, 1984. "A Price Discrimination Theory of Coupons," Marketing Science, INFORMS, vol. 3(2), pages 128-147.
    27. Moraga-González, José Luis & Wildenbeest, Matthijs R., 2008. "Maximum likelihood estimation of search costs," European Economic Review, Elsevier, vol. 52(5), pages 820-848, July.
    28. Sridhar Moorthy & Ralph A.Winter, 2006. "Price-Matching Guarantees," RAND Journal of Economics, The RAND Corporation, vol. 37(2), pages 449-465, Summer.
    29. Yuxin Chen & Chakravarthi Narasimhan & Z. John Zhang, 2001. "Consumer Heterogeneity and Competitive Price-Matching Guarantees," Marketing Science, INFORMS, vol. 20(3), pages 300-314, June.
    30. Daniel Ackerberg & Gautam Gowrisankaran, 2006. "Quantifying Equilibrium Network Externalities in the ACH Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 738-761, Autumn.
    31. Joseph E. Stiglitz & G. Frank Mathewson (ed.), 1986. "New Developments in the Analysis of Market Structure," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262690934, April.
    32. repec:bla:jindec:v:49:y:2001:i:4:p:521-39 is not listed on IDEAS
    33. Ambarish Chandra & Matthew Weinberg, 2018. "How Does Advertising Depend on Competition? Evidence from U.S. Brewing," Management Science, INFORMS, vol. 64(11), pages 5132-5148, November.
    34. Han Hong & Matthew Shum, 2006. "Using price distributions to estimate search costs," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 257-275, June.
    35. 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.
    36. Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 833-862, August.
    37. Belton, Terrence M., 1987. "A model of duopoly and meeting or beating competition," International Journal of Industrial Organization, Elsevier, vol. 5(4), pages 399-417.
    38. Frank Verboven, 2002. "Quality-Based Price Discrimination and Tax Incidence: Evidence from Gasoline and Diesel Cars," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 275-297, Summer.
    39. Juan Delgado & Michael Waterson, 2003. "Tyre price dispersion across retail outlets in the UK," Journal of Industrial Economics, Wiley Blackwell, vol. 51(4), pages 491-509, December.
    40. Kohn, Meir G. & Shavell, Steven, 1974. "The theory of search," Journal of Economic Theory, Elsevier, vol. 9(2), pages 93-123, October.
    41. Morten Hviid & Greg Shaffer, 2012. "Optimal low-price guarantees with anchoring," Quantitative Marketing and Economics (QME), Springer, vol. 10(4), pages 393-417, December.
    42. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
    43. Zhang, Z John, 1995. "Price-Matching Policy and the Principle of Minimum Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 43(3), pages 287-299, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Trost, Michael, 2022. "Unraveling the spreading pattern of collusively effective competition clauses," Hohenheim Discussion Papers in Business, Economics and Social Sciences 01-2022, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    2. Trost, Michael, 2021. "The collusive efficacy of competition clauses in Bertrand Markets with capacity-constrained retailers," Hohenheim Discussion Papers in Business, Economics and Social Sciences 04-2021, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    3. Juncai Jiang & Nanda Kumar & Brian T. Ratchford, 2017. "Price-Matching Guarantees with Endogenous Consumer Search," Management Science, INFORMS, vol. 63(10), pages 3489-3513, October.
    4. 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.
    5. Xulia González & Daniel Miles-Touya, 2018. "Price dispersion, chain heterogeneity, and search in online grocery markets," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 9(1), pages 115-139, March.
    6. Bottasso, Anna & Marocco, Paolo & Robbiano, Simone, 2020. "Price matching and platform pricing," MPRA Paper 104811, University Library of Munich, Germany.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. Yuxin Chen & Chakravarthi Narasimhan & Z. John Zhang, 2001. "Consumer Heterogeneity and Competitive Price-Matching Guarantees," Marketing Science, INFORMS, vol. 20(3), pages 300-314, June.
    12. 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.
    13. Enrique Fatás & Nikolaos Georgantz & Juan A. Máñez & Gerardo Sabater, 2013. "Experimental duopolies under price guarantees," Applied Economics, Taylor & Francis Journals, vol. 45(1), pages 15-35, January.
    14. Morten Hviid & Greg Shaffer, 2010. "Matching Own Prices, Rivals' Prices Or Both?," Journal of Industrial Economics, Wiley Blackwell, vol. 58(3), pages 479-506, September.
    15. Pinar Akman & Morten Hviid, 2005. "A Most-Favoured-Customer Guarantee with a Twist," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2005-08, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    16. Yuan, Hong & Krishna, Aradhna, 2011. "Price-Matching Guarantees with Endogenous Search: A Market Experiment Approach," Journal of Retailing, Elsevier, vol. 87(2), pages 182-193.
    17. Aleksandr Yankelevich & Brady Vaughan, 2016. "Price‐Match Announcements in a Consumer Search Duopoly," Southern Economic Journal, John Wiley & Sons, vol. 82(4), pages 1186-1211, April.
    18. 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.
    19. Morten Hviid & Greg Shaffer, 2012. "Optimal low-price guarantees with anchoring," Quantitative Marketing and Economics (QME), Springer, vol. 10(4), pages 393-417, December.
    20. Greg Kaplan & Guido Menzio & Leena Rudanko & Nicholas Trachter, 2019. "Relative Price Dispersion: Evidence and Theory," American Economic Journal: Microeconomics, American Economic Association, vol. 11(3), pages 68-124, August.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:qmktec:v:19:y:2021:i:3:d:10.1007_s11129-021-09242-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.