Price-Matching Guarantees with Endogenous Consumer Search
MetadataShow full item record
Price-matching guarantees (PMGs) are offered in a wide array of product categories in retail markets. PMGs offer consumers the assurance that, should they find a lower price elsewhere within a specified period after purchase the retailer will match that price and refund the price difference. The goal of this study is to explain the following stylized facts: (1) many retailers that operate both online and offline implement PMG offline but not online; (2) the practices of PMG vary considerably across retail categories; and (3) some retailers launch specialized websites that automatically check competitors’ prices for consumers after purchase. To this end, we build a sequential search model that endogenizes consumers’ pre- and postpurchase search decisions. We find that PMG expands retail demand but intensifies price competition on two dimensions. PMG drives retailers to offer deeper promotions because it increases the overall extent of consumer search, which we call the primary competition-intensifying effect. We also find a new secondary competition-intensifying effect, which results from endogenous consumer search. As deeper promotions incentivize consumers to continue price search, retailers are forced to lower the “regular” price to deter consumers from searching. The strength of the secondary competition-intensifying effect increases with the ratio of product valuation to search cost, which explains the variation in PMG practices online versus offline and across retail categories. We show that an asymmetric equilibrium exists such that one retailer offers PMG while the other does not. In this equilibrium, the PMG retailer may benefit from launching a price check website to facilitate consumers’ postpurchase search.
- All Faculty Deposits 
Showing items related by title, author, creator and subject.
Price thresholds, price volatility, and the private costs of investment in a developing country grain market Shively, Gerald E. (London, England: North-Holland, 2001)This paper discusses price thresholds and volatility in an African maize market, based on analysis of data from Ghana using linear and threshold-ARCH models. There was a non-linear link between past prices and the level ...
McKay, Sarah Michele (Virginia Tech, 2016-06-29)Organic food products are produced without synthetic chemicals, including herbicides, pesticides, and fertilizers. Food grown in organic systems that are certified organic by the United States Department of Agriculture ...