Who Benefits From Banning Discriminatory Wholesale Pricing When Retailers Can Price Match?

Abstract

In practice, numerous retailers are implementing price-matching guarantees (PMGs) whereby they promise to match the price of an identical product at a competing retailer. Despite strong connection between retailers and manufacturer, however, the literature has extensively studied retailers' PMGs without considering the manufacturers' wholesale pricing. Using a supply chain model with one manufacturer and two asymmetric retailers, we explore the impacts of wholesale pricing, either uniform or discriminatory wholesale pricing, on supply chain firms and consumers when retailers can offer PMGs. Our analysis reveals that retailers do not offer PMGs when the manufacturer is allowed to wholesale price discriminate. However, under uniform wholesale pricing, PMGs prevail at equilibrium as long as the degree of demand or cost asymmetry between the retailers and the average hassle costs are small. While firms' preferences of PMGs differ, there exists a Pareto zone wherein all firms prefer that the efficient retailer under demand asymmetry or the inefficient retailer under cost-asymmetry offers the PMG. Despite the potential benefits of PMG to the efficient retailer, enforcing uniform wholesale pricing reduces supply chain profit, consumer welfare, and social welfare. Compared to discriminatory wholesale pricing, uniform wholesale pricing is more likely to hurt consumer welfare and social welfare under cost asymmetry than under demand asymmetry. The welfare reducing effects of enforcing uniform wholesale pricing continue to hold steady under two-part tariff and quantity discount wholesale pricing. Our findings open a debate by policymakers on whether it is appropriate to regulating wholesale pricing in the presence of PMGs.