Competitive Price-Matching Guarantees: Equilibrium Analysis of the Availability Verification Clause Under Demand Uncertainty

Abstract

Price-matching guarantees involve a retailer matching the lower price of a competitor for an identical product. In reality, retailers often make such guarantees contingent on the verification of product availability at the competitor's location, and decline a price-match request if the product is not available there. This creates certain consternation on the part of customers. In this paper, we investigate the availability contingency strategy from the perspectives of both the retailers and the customers. Our analysis shows that availability contingency clauses intensify inventory competition between retailers and reinstitutes price competition, which is otherwise eliminated by unconditional price-matching guarantees. Consequently, despite what customers may think about the availability verification, it actually increases their surplus. On the other hand, such a clause reduces profits and, hence, is not the equilibrium strategy for retailers. Subsequently, we discuss how a likely customer behaviour pattern may be a plausible explanation regarding the use of the clause by the retailers in practice. This paper was accepted by Yossi Aviv, operations management.

A bane or a boon? Profit‐margin‐guarantee contract in a channel with downstream competition

“…Yuxin Chen et al (2001) were among the first to characterize two fundamental features of a price-matching-guarantee contract (i.e., a competition-dampening effect and a competitionenhancing effect). The subsequent literature extended their model by addressing more novel research questions, such as the consumer's postpurchase search decision (e.g., Jiang et al, 2017), the consumer's bounded rationality (e.g., T. Huang et al, 2017), and verification of product availability (e.g., Nalca et al, 2013). The other contracts (i.e., rebate contract, buyback contract, and revenue-sharing contract) are commonly observed within the distribution channel.…”

The impact of discriminatory pricing based on customer risk: an empirical investigation using indirect lending through retail networks

“…Some examples of the former include store-level pricing (Chintagunta et al , 2003; Khan and Jain, 2005; Montgomery, 1997), demographic-based pricing (Frank et al , 2014; Gary-Bobo and Larribeau, 2004), motivation-based pricing (Lee et al , 2013), lifestyle-based pricing (Bruwer and Li, 2017), knowledge-based pricing (Barrutia and Espinosa, 2014), targeted advertising/promotion (Esteves and Resende, 2016; Sayman and Hoch, 2014), behavior-based price discrimination (Caillaud and De Nijs, 2014; Conitzer et al , 2012; Shin and Sudhir, 2010) and situational/contextual price discrimination (Wakefield and Inman, 2003). Examples for the latter include the use of warranties (Soberman, 2003; Chu and Chintagunta, 2011), quantity discounts (Khan and Jain, 2005; Cohen, 2008; Subramaniam and Gal-Or, 2009), multi-period pricing (Geng et al , 2007), coupons (Anderson and Song, 2004; Dhar and Hoch, 1996; Narasimhan, 1984; Shaffer and Zhang, 1995), price promotions (Empen et al , 2015), price matching/price difference refund policies (Jain and Srivastava, 2000; Nalca et al , 2010; Nalca et al , 2013), bonus buys (Dhar and Hoch, 1996; Cui et al , 2008), rebates (Chen et al , 2005; Lu and Moorthy, 2007), probabilistic product offerings (Fay et al , 2015), metering (Gil and Hartmann, 2009) and multiple shipping options (Li and Dinlersoz, 2012).…”

Interaction between manufacturer's wholesale pricing and retailers' price‐matching guarantees

“…Nowadays, a detailed look at the fine print of PMGs reveals conditions such as the rival needing to be an authorized dealer, the stock keeping unit (SKU) of the product must be the same, and the product must be available in stock. Consequently, there has been interest in the Production and Operations Management operations management literature to investigate the impact of these conditions (Nalca et al, 2010(Nalca et al, , 2013(Nalca et al, , 2020.…”