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Price-Matching Guarantees and Equilibrium Selection in a Homogenous Product Market: An Experimental Study

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  • Subhasish Dugar

Abstract

Price-matching guarantees have been alleged to sustain collusive prices in a homogenous product market. Theories in this literature also suggest that there exist multiple equilibria (i.e., a set of price equilibria between the competitive and the monopoly price) when all sellers adopt these guarantees in such a market. Theoretical prediction in this case fails to pin down the actual behavior of players a priori. This paper illustrates the essential role of controlled experiment in testing the collusive theory of price-matching guarantees and thereby shedding light on the embedded equilibrium selection problem. In particular, this paper studies two highly stylized market models, obtains testable predictions, and lays out the design of the controlled experiment. Results indicate that these guarantees facilitate collusion among sellers and thus solve the equilibrium selection problem considerably. Copyright Springer Science+Business Media, LLC 2007

Suggested Citation

  • 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.
    • Handle: RePEc:kap:revind:v:30:y:2007:i:2:p:107-119
    DOI: 10.1007/s11151-007-9129-9
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Jan Potters & Sigrid Suetens, 2013. "Oligopoly Experiments In The Current Millennium," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 439-460, July.
    3. 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.
    4. Mongoljin Batsaikhan & Norovsambuu Tumennasan, 2018. "Output Decisions and Price Matching: Theory and Experiment," Management Science, INFORMS, vol. 64(8), pages 3609-3624, August.
    5. 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.
    6. Subhasish Dugar & Arnab Mitra, 2016. "Bertrand Competition With Asymmetric Marginal Costs," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1631-1647, July.
    7. 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.
    8. 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.

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    More about this item

    Keywords

    Price-matching guarantees; Collusion; Homogenous product market; Equilibrium selection; Experiment; L11; L12; C91;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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