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Do Price-Matching Guarantees with Markups Facilitate Tacit Collusion? Theory and Experiment

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  • Andreas Pollak

Abstract

This paper studies how competitive prices are affected by price-matching guarantees allowing for markups on the lowest competing price. This new type of low-price guarantee was recently introduced in the German retail gasoline market. Using a sequential Hotelling model, we show that such guarantees, similar to perfect price-matching guarantees, can induce collusive prices. In particular, this occurs if the first mover provides a price guarantee with a markup which is below a threshold value. In these cases, prices are on average set at the monopoly level. A laboratory experiment supports the theoretical predictions.

Suggested Citation

  • 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.
  • Handle: RePEc:kls:series:0093
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    References listed on IDEAS

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