Are price matching and logistics service enhancement always effective strategies for improving profitability?

Abstract

Driven by increasingly fierce market competition, many traditional retailers have started to adopt price matching under which they promise to match competitors’ lower prices for the same product, and many online retailers have started to conduct logistics service enhancement. Motivated by these observations, we use the Hotelling model to develop a duopoly game, in which a traditional retailer and an online retailer sell the same product to consumers, to examine the effectiveness of price matching and logistics service enhancement in improving profitability. The results show that in the scenario where the online retailer does not conduct logistics service enhancement, the traditional retailer benefits from price matching only when the transportation cost to the brick-and-mortar store is high. However, in the scenario where the online retailer conducts logistics service enhancement, when the transportation cost is relatively low, the traditional retailer also has a chance to benefit from price matching. In contrast, regardless of the traditional retailer’s price matching strategy, the online retailer always benefits from logistics service enhancement. We also reveal that regardless of the online retailer’s logistics service enhancement strategy, the traditional retailer’s price matching can lead to Pareto improvement for both retailers as long as the transportation cost is high enough. However, only when the traditional retailer adopts price matching does the online retailer’s logistics service enhancement have a chance to lead to Pareto improvement for both retailers.