Model of retail price match guarantees

Abstract

Price match guarantee (PMG) policies are steps taken by retailers to satisfy buyers when there is a difference between their own price on a specific item and a rival retailer's selling price on the identical or a nearly identical item at about the same time. In some instances, the retailer simply declares it will match any rival's lower prices. Retailers who are more proactive may audit the prices of nearby retailers, usually either by reviewing rival advertising or through comparison shopping, then promptly lower their own prices to match. The authors propose a mathematical model to help the retailer arrive at optimal pricing when the retailer decides to adopt PMG. The model shows that the optimal price is a function of the transaction costs of processing refunds, consumers' price awareness, the proportion of customers who experience dissatisfaction after paying a higher price, the strength of that dissatisfaction, the persistence of dissatisfaction, consumers' price sensitivities, price tolerance of customers, and the unit cost of the product. While the first five factors affect the optimal price level negatively, the other three factors influence it positively. Using numerical simulations, the model is applied to a wide variety of retailing scenarios. Managerial implications and future research directions are discussed.