Hassle Costs, Price-Matching Guarantees and Price Competition: An Experiment

Abstract

In this study, we experimentally investigate whether the collusion-facilitating nature of price-matching guarantees survives the reasonable modification of hassle costs incurred by buyers to enact these guarantees. Hviid and Shaffer [1999] (HS) argue that the presence of an arbitrarily small number of positive hassle costs buyers undermines incentives for collusion in symmetric markets. To evaluate the impact of hassle costs, we develop four stylized one-shot price competition models that have sharp testable predictions. While the first model directly captures the implications of HS, the last three models deal with the theoretical analysis of hassle costs in symmetric markets by introducing varying proportions of positive and zero hassle costs buyers, previously unexplored in the literature. Although theory predicts that the competitive price should emerge in equilibrium in all four models, we find significant price differences in the experiment.