Here's what I don't get. Why do a price match guarantee? Why not just price your items lower? Or do a "match" where you guarantee every item for 10 cents cheaper than your competitors?
> Why do a price match guarantee? Why not just price your items lower?
MAD [1]. Price-match guarantees are meant to deter price competition. If you cut your price below a price-matching competitor's, the time you have the best price will be short. After that, less profit for everyone (assuming similar cost structures). If, on the other hand, you match, everyone keeps their market share and margins.
Price competition in a price-matching market happens when someone has lower costs. It also happens when someone uses cheap capital to buy market share, intending to make up for lower margins with volume, e.g. to cover fixed costs.
> Don't we want companies to engage in price competition...?
The literature is mixed on the effects of price-matching guarantees [1][2]. The most compelling resolution I've read says "price-matching guarantees can facilitate monopoly pricing only if firms automatically match prices. If consumers must instead request refunds (thereby incurring hassle costs)...any increase in equilibrium prices due to firms’ price-matching policies will be small; often, no price increase can be supported" [3].
In any case, enforcing an automatic price-matching ban would be difficult. Would you prohibit firms from lowering their prices to match competitors'? If not, it would just take a few turns of the ratchet to send the message to would-be competitors (and consumers). Whether the consumer surplus from those ratchet turns are worth the enforcement cost is an open question.
>In any case, enforcing an automatic price-matching ban would be difficult. Would you prohibit firms from lowering their prices to match competitors'? If not, it would just take a few turns of the ratchet to send the message to would-be competitors (and consumers). Whether the consumer surplus from those ratchet turns are worth the enforcement cost is an open question.
Couldn't you just make a law saying "price-match guarantees are illegal"? Firms who explicitly move prices to match each other is fine with me, but the match guarantee is problematic. It seems that your conclusion is that companies use matching guarantees to implicitly collude but that even if we got rid of this they would still collude. But we should still stamp out collusion wherever we see it even if that puts us in a whack-a-mole situation.
What OP is saying is that this isn't competitive, rather it's a way to signal to other participants not to cut their prices. They can't do this outright because that would be collusion and violate anti-trust laws. OP referenced MAD which is the cold war tactic of mutually assured destruction. Basically, if you nuke me I nuke you back and we all die...so nobody nukes anyone. This is the same but with price competition. If you cut your prices to try to gain market share, I'll cut mine too. You'll gain no market share but you will lose revenue.
We want companies to engage in price competition. Companies don't want to engage in price competition. They want to be able to sell items for as much as possible. Price match guarantee is a legal way for companies to collude on prices.
> Don't we want companies to engage in price competition though?
As consumers, absolutely we do. But the person asking the question asked why companies don't do that, and the answer is that it's a bad business decision for them.
Because not only can advertise your price matching feature and get more customers, but you charge your normal prices to the 90% of people who don't bother to price match.
Basically you can have your cake and eat it too. (To some extent)
Doesn't that seem like some form of tacit collusion though? In this case it seems the price match flips the competitive environment so that competitors raise prices instead of lowering them.
Agreed. Prices being equal, why would I go with eBay? Their customer service and return policies are awful. It's 10x worse if you pay through PayPal. Amazon is basically no questions asked.
I agree with you. Many of my racing friends get prices online and then have Discount Tire price match. I think that's stupid. I'd rather support the vendor that prices things "right" in the first place.
