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The Welfare Losses from Price-Matching Policies

Author

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  • Edlin, Aaron S.
  • Emch, Eric R.

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 price-matching markets with entry to monopoly and price-matching markets without entry, and find that price matching with entry creates greater welfare losses than monopoly in markets with a low ratio of fixed to marginal cost. We illustrate this result using parameters from the US wholesale gasoline and air travel markets and relate our model to price matching among NASDAQ market makers.

Suggested Citation

  • Edlin, Aaron S. & Emch, Eric R., 1999. "The Welfare Losses from Price-Matching Policies," Berkeley Olin Program in Law & Economics, Working Paper Series qt43b7w47c, Berkeley Olin Program in Law & Economics.
  • Handle: RePEc:cdl:oplwec:qt43b7w47c
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    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. Kaplow, Louis & Shapiro, Carl, 2007. "Antitrust," Handbook of Law and Economics, Elsevier.
    3. 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.
    4. Dewenter Ralf & Schwalbe Ulrich, 2016. "Preisgarantien im Kraftstoffmarkt," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(3), pages 276-288, September.
    5. 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.
    6. 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.
    7. 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.
    8. Raskovich, Alexander, 2007. "Retail buyer power through steering," Economics Letters, Elsevier, vol. 96(2), pages 221-225, August.
    9. 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.
    10. 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.
    11. 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.
    12. Dong, Gang & Huang, Rongbing & Ng, Peggy, 2016. "Tacit collusion between two terminals of a port," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 93(C), pages 199-211.
    13. Morten Hviid & Greg Shaffer, 2010. "MATCHING OWN PRICES, RIVALS' PRICES OR BOTH? -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 58(3), pages 479-506, September.
    14. Morten Hviid & Greg Shaffer, 2012. "Optimal low-price guarantees with anchoring," Quantitative Marketing and Economics (QME), Springer, vol. 10(4), pages 393-417, December.
    15. Arbatskaya, Maria, 2001. "Can low-price guarantees deter entry?," International Journal of Industrial Organization, Elsevier, vol. 19(9), pages 1387-1406, November.

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