Matching Competitor's Price in the Presence of Operational Frictions

Abstract

Problem Description: A price match guarantee (PMG) is a retail offer to match a rival's retail price on the same product. We ask whether or not a brick-and-mortar retailer should offer a PMG, knowing that a consumer can buy the same product either from her or a competing, manufacturer-owned online store. Academic/Practical Relevance: We provide a new multi-channel framework that combines assortment, stocking, and pricing decisions in the presence of stochastic demand and quantity constraints. Previous structures at most addressed pricing and variety with deterministic demand. Methodology: We theorize that a manufacturer can simultaneously sell his output through an independent brick-and-mortar retailer and his online store. The manufacturer designs the product line and sets a wholesale price. He can develop the same product design for both channels. Or, he can create a separate product for each channel. The independent retailer responds to the product line design and the wholesale price by announcing a stocking quantity. Then, demand realizes, and both firms set retail prices in their stores. The brick-and-mortar retailer cannot sell more than what she ordered. Results: In the literature, PMGs are mostly seen as a profitable way to facilitate cartel pricing. Previous studies, however, did not consider the operational complexities of distributing goods to stores. In our model, which does consider such complexities, PMGs can be either profitable or unprofitable. We also find that the brick-and-mortar retailer might offer a PMG not to engage in cartel pricing but to be given a higher-quality product from the manufacturer that she would be otherwise. Finally, we find that retailers who provide PMGs may go beyond price-matching to adopt a price-beating policy. Managerial Implications: We explain that the optimality PMGs boils down to a parameter that describes order fulfillment efficiency online and a parameter that describes fulfillment efficiency at the brick-and-mortar store.