Low-Price Guarantees in a Dual-Channel of Distribution

Abstract

Manufacturers routinely rely on retailers to reach potential customers. Concurrently, they often offer low-price guarantees (LPGs) to customers who purchase through their direct channel. That is, should consumers find a lower price from distribution partners, manufacturers promise to match or even beat the lower price. Many manufacturers, such as Apple, Dell, Hewlett-Packard, Lenovo, and Goodyear, use price-matching guarantees (PMGs) against retailers. In the online travel industry, price-beating guarantees (PBGs) are prevalent among travel suppliers. In this paper, we develop a game-theoretic model to investigate the manufacturer's optimal choice of LPG policies and its implications for the manufacturer, retailer, and channel. Our analysis demonstrates that no LPG, PMG, and PBG can each emerge in equilibrium depending on consumer characteristics. While LPGs can improve channel profit, they may benefit the manufacturer at the expense of the retailer. As such, LPGs can intensify vertical channel conflict. However, both horizontal channel conflict and vertical channel conflict are present in dual channels. LPGs are not merely price discrimination device, they mitigate horizontal channel conflict. The benefit of LPGs in reducing horizontal channel conflict outweighs the loss from intensified vertical channel conflict under a wide range of conditions. Therefore, LPGs serve as channel coordination devices.