Abstract
Many low-price guarantees are offered by small local firms who compete against much larger rivals. The prices of these larger rivals are often set nationally and thus are independent of local market conditions. Our objective in this paper is to explain why small firms in such environments might nevertheless adopt low-price guarantees. We characterize when offering a low-price guarantee is profitable, and assess which form it should take (i.e., conditional on offering a low-price guarantee, should the small firm offer to match or beat its larger competitor’s prices). We also assess the implications thereof (i.e., do the low-price guarantees benefit or harm the small firm’s customers).
Highlights
Many firms have a “low-price guarantee” policy in which they promise to match or beat any lower price announced by a competitor
Our objective in this paper is to explain why small, local firms might want to adopt low-price guarantees even if they would have no effect on their larger rivals’ prices
We demonstrate the existence of a lower bound on Px, PLPM, which is less than PB, and an upper bound on Px, PHPM, which is between PU and PA, such that for all values of Px between PLPM and PHPM, the local firm’s profit under price matching will be higher than that under uniform pricing
Summary
Many firms have a “low-price guarantee” policy in which they promise to match or beat any lower price announced by a competitor. Consumers who buy from the small firm and who invoke its guarantee pay a price which is either at or below the anchor price, depending on whether the small firm has promised to match or beat its rivals’ prices These consumers tend to be relatively more price sensitive. If the anchor price is instead moderately higher or lower than the small firm’s optimal uniform price, distortions relative to the two profit-maximizing group prices are inevitable In these cases, a distortion at the higher end can best be mitigated when price-beating guarantees are used, whereas distortions at the lower end can best be mitigated when pricematching guarantees are used (they would be even worse if pricebeating guarantees were used). These examples are of policies that involve large firms and failed, they do suggest that a surprising number of consumers may take advantage of these guarantees when offered
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
