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Matching Own Prices, Rivals' Prices, or Both

Author

Listed:
  • Morten Hviid

    (Centre for Competition Policy and Norwich Law School, University of East Anglia)

  • Greg Shaffer

    (Centre for Competition Policy, University of East Anglia; and Simon School of Business, University of Rochester)

Abstract

Many retailers promise that they will not be undersold by rivals (price-matching guarantees) and extend their promise to include their own future prices (most-favoured-customer clauses). This is puzzling because the extant literature has shown that each promise independently has the potential to facilitate supracompetitive prices, and so one might think that the two promises are substitutes. In this paper, we consider why a firm might make both promises in the same guarantee, and show that price-matching guarantees and most-favoured-customer clauses complement each other and can lead to higher prices than either one could have facilitated by itself.

Suggested Citation

  • Morten Hviid & Greg Shaffer, 2008. "Matching Own Prices, Rivals' Prices, or Both," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2008-26, Centre for Competition Policy, University of East Anglia, Norwich, UK..
  • Handle: RePEc:uea:ueaccp:2008_26
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    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. Monika Schnitzer, 1994. "Dynamic Duopoly with Best-Price Clauses," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 186-196, Spring.
    4. Corts, Kenneth S., 1997. "On the competitive effects of price-matching policies," International Journal of Industrial Organization, Elsevier, vol. 15(3), pages 283-299, May.
    5. Neilson, William S. & Winter, Harold, 1992. "Unilateral most-favored-customer pricing : A comparison with Stackelberg," Economics Letters, Elsevier, vol. 38(2), pages 229-232, February.
    6. Thomas E. Cooper, 1986. "Most-Favored-Customer Pricing and Tacit Collusion," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 377-388, Autumn.
    7. Neilson, William S. & Winter, Harold, 1994. "Enhancing bargaining power with most-favored-customer pricing," Economics Letters, Elsevier, vol. 44(1-2), pages 61-66.
    8. 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.
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    10. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    11. 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.
    12. 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.
    13. 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.
    14. William S. Neilson & Harold Winter, 1993. "Bilateral Most-Favored-Customer Pricing and Collusion," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 147-155, Spring.
    15. Logan, John W. & Lutter, Randall W., 1989. "Guaranteed lowest prices: do they facilitate collusion?," Economics Letters, Elsevier, vol. 31(2), pages 189-192, December.
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    17. Sridhar Moorthy & Ralph A.Winter, 2006. "Price-Matching Guarantees," RAND Journal of Economics, The RAND Corporation, vol. 37(2), pages 449-465, Summer.
    18. Corts, Kenneth S., 1995. "On the robustness of the argument that price-matching is anti-competitive," Economics Letters, Elsevier, vol. 47(3-4), pages 417-421, March.
    19. repec:bla:jindec:v:47:y:1999:i:2:p:145-67 is not listed on IDEAS
    20. Arbatskaya, Maria, 2001. "Can low-price guarantees deter entry?," International Journal of Industrial Organization, Elsevier, vol. 19(9), pages 1387-1406, November.
    21. 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)

    Citations

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    Cited by:

    1. Bottasso, Anna & Marocco, Paolo & Robbiano, Simone, 2020. "Price matching and platform pricing," MPRA Paper 104811, University Library of Munich, Germany.
    2. Tingliang Huang & Zhe Yin & Ying-Ju Chen, 2017. "Managing Posterior Price Matching: The Role of Customer Boundedly Rational Expectations," Manufacturing & Service Operations Management, INFORMS, vol. 19(3), pages 385-402, July.
    3. Sun, Yanhong & Sheng, Yiyun & Yan, Shuai & Zhang, Wei, 2023. "Pricing strategies in reward-based crowdfunding: Whether to introduce price guarantee?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 170(C).
    4. Elhauge, Einer & Wickelgren, Abraham L., 2015. "Robust exclusion and market division through loyalty discounts," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 111-121.
    5. Aydinliyim, Tolga & Pangburn, Michael S. & Rabinovich, Elliot, 2017. "Inventory disclosure in online retailing," European Journal of Operational Research, Elsevier, vol. 261(1), pages 195-204.
    6. Granero, Lluís M., 2013. "Most-favored-customer pricing, product variety, and welfare," Economics Letters, Elsevier, vol. 120(3), pages 579-582.
    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. 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.
    9. Constantinou, Evangelos & Bernhardt, Dan, 2018. "The price-matching dilemma," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 97-113.
    10. 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.

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    More about this item

    Keywords

    facilitating practices; low-price guarantees; antitrust policy;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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