Abstract
This paper examines the effect of price matching guarantees (PMGs) in a sequential search model. PMGs are simultaneously chosen with prices and some consumers (shoppers) know the firms' decisions before buying, while others (non-shoppers) enter a shop first before observing a firm's price and whether or not the firm has a PMG. In such an environment, PMGs increase the value of buying the good and therefore increase consumers' reservation prices. This increase is so large that even after accounting for the possible execution of PMGs, firms profits are larger under PMGs than without. We also consider the incentives of firms to choose PMGs and show that an equilibrium where all firms off er PMGs does not exist because of a free-riding problem. PMGs can only be an equilibrium phenomenon in an equilibrium where some firms do and others do not off er these guarantees.
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