Optimal low-price guarantees with anchoring

Abstract

Many low-price guarantees are offered by small local firms who compete against much larger rivals. The prices of these larger rivals are often set nationally and thus are independent of local market conditions. Our objective in this paper is to explain why small firms in such environments might nevertheless adopt low-price guarantees. We characterize when offering a low-price guarantee is profitable, and assess which form it should take (i.e., conditional on offering a low-price guarantee, should the small firm offer to match or beat its larger competitor's prices). We also assess the implications thereof (i.e., do the low-price guarantees benefit or harm the small firm's customers).

Price-Matching Guarantees with Endogenous Consumer Search

“…We also find that endogenous consumer search could lead to a secondary effect on retail competition that affects the retailers' regular price, which has been ignored in this stream of work. Png and Hirshleifer (1987), Corts (1997), Chen et al (2001), and Hviid and Shaffer (2012) assume that some consumers are exogenously endowed with the ability to take advantage of PMG while others cannot. Png and Hirshleifer (1987) find that PMG induces retailers to charge higher prices and is always profitable for retailers.…”

“…Chen et al (2001) show that both price and profit can go up or down when retailers institute PMG depending on market parameters. Hviid and Shaffer (2012) investigate the case where small local stores set prices at the local level while large chain stores set prices at the national level independent of local market conditions. They delineate the market conditions under which it is optimal for the local stores to offer PMG, price-beating guarantee (PBG), and no price guarantee.…”

Price Guarantees, Consumer Search, and Hassle Costs

“…The model could also be extended to allow for price beating guarantees in addition to the price meeting guarantees as considered in Hviid/Shaffer (2011). Together with asymmetric firms, this could yield further insights why some firms use price meeting guarantees while others employ price beating guarantees.…”

“…The competitive effects of price beating guarantees have been analyzed in particular by Corts (1995), Hviid/Shaffer (1994, 2011 and Kaplan (2000). This literature has pointed out that the effects of a price beating guarantee depend on whether the guarantee refers to the advertised price or to the actual selling price.…”

Small business marketing strategies for physical therapy practice owners

“…Brand anchoring is a metaphor for the associations a customer makes to a brand by way of memory links considered chains to the anchor, which is the brand (Aaker, 1991;Esch, Schmitt, Redler, & Langner, 2009;Hviid & Shaffer, 2012). Anchoring is a form of consumer bias but can work to a small business owner's advantage.…”