Competitive Price-Matching Guarantees Contingent on Product Availability

Abstract

Price-matching guarantees (PMGs) involve a retailer matching the lower price of a competitor for an identical product. In practice, retailers often make such guarantees contingent on verification of product availability at the competitor location and decline the price-match request if the product is not available there. In this paper, we model a multi-stage duopoly game where the stochastic customer demand is sensitive to both price and product availability. The objective is to understand why and when retailers should verify availability as a price-match prerequisite, and how it affects the intensity of price and inventory competition. Our results establish that the verification of availability may have pro-competitive or anti-competitive effects depending on how cognizant customers are to the implications of demand uncertainty.We first analyze a model where customers are mindful of the fact that retailers will decline their price-match requests based on the unavailability of the product at the competing retailer while making store choice decisions, and show that verification of availability is not the equilibrium strategy since it (weakly) increases the intensity of price and inventory competition between the retailers, increases consumers' surplus, and decreases retail profits. We show that one possible reason for retailers to offer availability contingent PMG is that customers concentrate on price and discount the effects of product availability while making store decisions. In fact, if customers ignore product availability issues while making store choices, then verification of availability is indeed the equilibrium strategy for retailers since it increases prices and order quantities, allows them to price discriminate against customers, decreases consumers' surplus, and increases retail profits. Finally, we show that the above results are valid irrespective of whether customers are homogenous or heterogenous in terms of the price information they have prior to their store visits.