Hassle Costs Research Articles

Hassle Costs, Price-Matching Guarantees and Price Competition: An Experiment

In this study, we experimentally investigate whether the collusion-facilitating nature of price-matching guarantees survives the reasonable modification of hassle costs incurred by buyers to enact these guarantees. Hviid and Shaffer [1999] (HS) argue that the presence of an arbitrarily small number of positive hassle costs buyers undermines incentives for collusion in symmetric markets. To evaluate the impact of hassle costs, we develop four stylized one-shot price competition models that have sharp testable predictions. While the first model directly captures the implications of HS, the last three models deal with the theoretical analysis of hassle costs in symmetric markets by introducing varying proportions of positive and zero hassle costs buyers, previously unexplored in the literature. Although theory predicts that the competitive price should emerge in equilibrium in all four models, we find significant price differences in the experiment.

Coordinating Price Reductions and Coupon Events

In this article, the authors use an economic model to show that it may be optimal to lower the retail price during a coupon event when marginal consumers have moderate hassle costs of coupon redemption. Results from the model offer predictions on the relationships among coupon redemptions, shelf price, and coupon face value. The authors test these predictions on a large data set of hundreds of coupon events across six packaged goods categories. The data show that when a small coupon face value is offered, the shelf price is likely to be reduced. They also find that coupon efficiency increases when there is a lower retail price. The results are of interest to managers planning a promotion calendar and deciding whether to coordinate price promotions with coupon events, and they contribute to economic theory. When a firm moves from uniform pricing (e.g., no coupons) to second-degree price discrimination (e.g., coupons), all consumers may face a lower price. This finding has public policy implications because second-degree price discrimination may increase the welfare of every consumer.

On the Incidence and Variety of Low‐Price Guarantees

Abstract This paper provides evidence of the incidence and variety of low‐price guarantees (promises to match or beat a rival’s price) using data obtained from newspaper advertisements in 37 metropolitan areas in the United States. We have a total of 515 low‐price guarantees in our sample. We document their features, and we infer firms' motives and effects from these features. The evidence suggests that the majority of low‐price guarantees are not consistent with their use as a facilitating device because they tend to apply only to rival firms’ advertised prices or they are associated with high hassle costs. The evidence also suggests that price‐beating and price‐matching guarantees differ significantly in their features. The former are associated with higher hassle costs, apply disproportionately to rival firms’ advertised prices, and are more likely to allow postsale search than are price‐matching guarantees.

Price-Matching Guarantees, Retail Competition, and Product-Line Assortment

Price-matching guarantees (PMGs) are offers to match or beat a competitor's price on a specific item. Such guarantees are extremely common in U.S. retail practice, and appear on their face to be very beneficial to consumers because they make an implicit promise to the consumer that she won't pay by shopping at the PMG-offering retailer. However, the evidence about why PMGs are used, and their effect on prices, consumer welfare, and retail profitability is mixed. Some authors have found that PMGs can actually facilitate tacit collusion between competing retailers, not competition. Others find that mitigating factors such as hassle costs limit the collusive impact of PMGs. The limited empirical evidence in the area provides some support for the collusive view but overall it is inconclusive. The existing analytic literature makes the assumption that each retailer sells a single product that is identical with (or completely substitutable for) the product of any competing firm. But, in reality, competing retailers often sell multiple products, and these products do not always overlap. This poses a conundrum for theory. Since PMG's only apply when consumers find a lower price on the same item at a competing store, why would retailers ever offer PMGs and not have identical product lines? In this paper, we start with the real-world observation that some retailers may be more space-constrained (have less shelf space) than others, and we seek to address the conundrum by examining firms' competitive incentives to offer PMGs, and the implications of doing so, in a world where retailers may vary in their ability to carry a broad (versus a narrow) product line. These issues are particularly relevant, given that, in practice, most if not all retailers face some limitations on their shelf space. Our results show that with unlimited shelf space, competing retailers both offer PMGs and both stock the entire available product line. Monopoly pricing prevails, consistent with the earlier literature. But in a market with asymmetric shelf-space availability, either product variety will be severely limited or retailers will offer different arrays of products. Weak substitution between products leads to the latter, with pricing between the differentiated-products Bertrand and monopoly levels; strong substitution leads to the former, with pricing at the monopoly level. In a market where both retailers are shelf-space-constrained, the equilibrium strategies also depend on the degree of substitutability of products in the market. If products are weak substitutes, the retailers carry non-overlapping product lines, differentiated-products Bertrand pricing prevails, and PMGs are not offered. In contrast, if products are not very differentiated, the retailers carry the same product, offer PMGs, and set monopoly prices. In short, our results demonstrate that the nature of product variety, and the availability of retail shelf space, are key market characteristics that jointly and strongly affect the optimality of PMGs and the resulting pricing, profitability, and consumer welfare characteristics of the market. product-line assortment

Service Escape: Profiting from Customer Cancellations

This paper explores the benefits of letting customers escape from pre-purchased service contracts by offering refunds for cancellations. We show that such a policy creates opportunities for multiple selling in a capacity-constrained service - i.e., collecting cancellation fees from advance buyers who cancel, and then reselling the freed slots. The better the alternative that motivates a cancellation, the more profitable is a refund-for-cancellations policy compared with a no-refund policy that locks-in customers. Such refunds can be profitable even when the cancelled unit has to be resold at a lower price and even when advance buyers would be willing to abandon the service for no refund. In contrast to previous research on money-back guarantees for durable goods, we show that offering refunds for service cancellations can be profitable without charging a higher price compared with a no-refund policy, and motivates service providers to decrease rather than increase the hassle cost associated with customer cancellations. Our research complements the extant theory on advance-selling by suggesting a new profit advantage of advance selling: capturing some of the consumer-added surplus that is created when customers find new alternatives (i.e., when finding attractive alternatives, customers are willing to pay a fee to terminate the pre-purchased contract) - a profit potential that is not possible under a spot selling strategy. Finally, research on yield-management typically assumes exogenous no-shows by advance buyers. We model customer cancellations as endogenous and show that offering refunds for cancellation reduces the need to reserve capacity for high-paying customers and improves capacity utilization.

Hassle Costs: The Achilles' Heel of Price‐Matching Guarantees*

We show that price‐matching guarantees can facilitate monopoly pricing only if firms automatically match prices. If consumers must instead request refunds (thereby incurring hassle costs), we find that any increase in equilibrium prices due to firms' price‐matching policies will be small; often, no price increase can be supported. In symmetric markets price‐matching guarantees cannot support any rise in prices, even if hassle costs are arbitrarily small In asymmetric markets, higher prices can be supported, but the prices fall well short of maximizing joint profits. Our model can explain why some firms adopt price‐matching guarantees while others do not.

Hassle Costs: The Achilles' Heel of Price-Matching Guarantees

Hassle Costs: The Achilles' Heel of Price-Matching Guarantees