Consumer Information Heterogeneity and Competitive Strategies under Price-Matching Guarantees
Price-matching guarantees are widely used in consumer and industrial markets. Previous studies argue that they are a marketing tactic that facilitates implicit price collusion. We show, however, that when consumers have incomplete price information, the adoption of price-matching guarantees allows consumer to shop opportunistically and reduce their store loyalty which in turn intensifies price competition through reducing the (inframarginal) costs of price promotions. However, the stores cannot help but use this marketing tactic because they are caught in a Prisoner's Dilemma situation.
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