Rafi Mohammed

Are Price Matching Guarantees Good for Consumers?

Posted on October 1st, 2007 (0 Comments)

I love Los Angeles! One of the reasons for my endearment is the city’s eclectic mix of retail stores. It’s amazing: block after block full of retail shops that sell a diverse variety of products…I often wonder how these retailers survive amidst such intense competition. While some stores resort to hiring unemployed actors dressed in Uncle Sam suits on stilts to wave customers in, others focus on my favorite strategy…price. Driving around LA over the weekend, I came across a store with billboards brashly announcing “we meet any competitors’ price” as well as “we accept all competitors’ coupons.” These bold pricing claims reminded me of the longstanding debate amongst economists about pricing matching guarantees. Are they good or bad for consumers? On first blush, it’s easy to think “of course these guarantees benefit consumers”…but there are other less than consumer friendly reasons for employing this pricing practice.

The way I typically view price matching is as a form of differential pricing. Customers that care about price will march to their favorite store with proof that a local competitor (price match guarantees rarely apply to Internet prices) has a lower price. Matching is a discrete way to profitably serve price conscious customers. Of course, I’d argue that if someone comes to your store demanding a price match, you must be offering them some value that the low price store isn’t. Or else they would have purchased from them. But realistically, this practice keeps price sensitive customers in the fold and that’s good.

Many have argued that matching is a form of cartel pricing – which lowers price competition. The idea is if customers know that local stores will match prices, there’s less incentive for retailers to discount. Very possible.

And finally, offering a price match guarantee could be a signal to consumers that their prices are the lowest. It makes sense right? If a retailer is willing to match prices, they must offer low prices.

Maria Arbatskaya, Morten Hviid, and Greg Shaffer recently published a paper in the International Journal of Industrial Organization titled “On the Use of Low-Price Guarantees to Discourage Price Cutting” that investigates price matching. The authors collected data on tire prices from Sunday newspapers during Fall 1996. The results were fascinating. 86% of retailers that offered to match any price – advertised or not – didn’t offer the lowest price. Thus, assuming these retailers offer low prices would be incorrect. These retailers seem to using price matching as a form of differential pricing. Just as interestingly, some retailers only offer to match advertised prices. The authors discovered that 75% of retailers offering this type of price match had the lowest price – indicating these retailers were trying to signal they have the lowest prices. Skeptical shoppers can easily verify this claim by comparing their prices with competitor prices.

Pretty interesting huh? Does your favorite retailer match any price or only advertised prices? There’s certainly rationale and evidence that price matching isn’t beneficial to customers.

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