Rafi Mohammed

Why Price Match Guarantees Can Be Bad for Consumers

Posted on October 23th, 2012 (0 Comments)

Reprinted from the Harvard Business Review website. 

Last week, Target did the once unthinkable. In addition to matching prices of local brick and mortar stores, it announced this holiday season it would also match prices of any product sold by major Internet retailers including Amazon.com, BestBuy.com, Walmart.com, and Toysrus.com.

While many stores pledge to match prices of local brick and mortar stores — consumers have to bring in a local competitor's advertisement as proof — until now matching Internet prices has been taboo. After all, physical store retailers have higher costs and their mantra has been "buy from us because we offer more benefits," including the ability to see/touch products, receive advice from knowledgeable sales people, and enjoy products instantly. But now some physical retailers are saying "the heck with it": despite their own cost disadvantages and despite offer a better shopping experience, they are aggressively courting customers with lowest price pledges. Best Buy is also matching prices — but only on appliances and electronics.

So price matching policies are good for consumers, right? Not necessarily. Consider the following three reasons:

They may reduce competition: Economists and antitrust authorities have long been concerned that price matching policies may actually reduce the incentives of stores to lower prices. If retailers know that lowering prices (to sell more of a product as well as spur additional purchases) will be matched by rivals, there's less upside to discounting — what's the point if consumers will simply go to their favorite store and request a price match?

They provide a false sense of security: Academics Maria Arbatskaya, Morten Hviid, and Greg Shaffer published a paper in the International Journal of Industrial Organization titled "On the Use of Low-Price Guarantees to Discourage Price Cutting" that empirically investigates price matching. The authors collected data on tire prices from Sunday newspapers. They found that 86% of retailers that offered to match any price — advertised or not — did not offer the lowest price. Interestingly though, 75% of retailers that offered to match only advertised prices actually offered the lowest prices.

They penalize inattentive shoppers: Under price matching guarantees, consumers who play the game (by aggressively comparing prices before buying) will win, but those who don't will pay more. With the significant extra operating costs borne by brick and mortar retailers, how will they make up margins lost from matching Internet prices? Physical stores will become more dependent on implementing differential pricing (the strategy of charging different prices for the same product to different customers) to keep their bottom lines in check. To do this, they will likely increase prices.

Price sensitive customers — those who credibly identify themselves by conducting pre-shopping research and entering stores armed with fistfuls of printouts proving lower prices offered by rivals — will reap excellent deals. However, those who purchase on the faith that they are getting a "reasonable price" will get the short stick — they'll pay more. Realistically, how many of us are going to show up with price match evidence for the majority of our brick and mortar purchases?

So what do you think? Is price matching good for consumers? Will price matching increase or decrease discounting this holiday season? What do you think are the long term implications of the willingness of brick and mortar stores to match Internet retailer prices?

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