Price-Matching Guarantees with Endogenous Consumer Search

Abstract

Abstract. Price-matching guarantees (PMGs) are offered in a wide array of product categories in retail markets. PMGs offer consumers the assurance that, should they find a lower price elsewhere within a specified period after purchase the retailer will match that price and refund the price difference. The goal of this study is to explain the following stylized facts: (1) many retailers that operate both online and offline implement PMG offline but not online; (2) the practices of PMG vary considerably across retail categories; and (3) some retailers launch specialized websites that automatically check competitors' prices for consumers after purchase. To this end, we build a sequential search model that endogenizes consumers' pre-and postpurchase search decisions. We find that PMG expands retail demand but intensifies price competition on two dimensions. PMG drives retailers to offer deeper promotions because it increases the overall extent of consumer search, which we call the primary competition-intensifying effect. We also find a new secondary competition-intensifying effect, which results from endogenous consumer search. As deeper promotions incentivize consumers to continue price search, retailers are forced to lower the "regular" price to deter consumers from searching. The strength of the secondary competition-intensifying effect increases with the ratio of product valuation to search cost, which explains the variation in PMG practices online versus offline and across retail categories. We show that an asymmetric equilibrium exists such that one retailer offers PMG while the other does not. In this equilibrium, the PMG retailer may benefit from launching a price check website to facilitate consumers' postpurchase search.History: Accepted by J. Miguel Villas-Boas, marketing.

Price-Matching Guarantees as a Direct Signal of Low Prices

“…Thus, their model is not compatible with the role of PMGs as a signal of low prices. Jiang, Kumar, and Ratchford (2016) develop a model to explain why PMGs are often implemented offline but not online, and why the practice of PMGs varies considerably across retail categories. In their model, consumers differ in their search cost pre-and postpurchase, which leads to the existence of three types of consumers: "shoppers," who have zero search costs and go directly to the store with the lowest price; "nonshoppers," who have high search costs and go to the store where they expect prices to be lower (the price expectation depends on whether a firm offers PMGs, as consumers know which firms offer them); and "refundees," who have high search cost prepurchase and zero search cost postpurchase.…”

“…Whereas Janssen and Parakhonyak (2013) assume that no consumer knows which firms offer PMGs, Jiang, Kumar, and Ratchford (2016) and Yankelevich and Vaughan (2016) assume the opposite: all consumers know which firms provide a PMG. In either case, PMGs cannot act as a signal of low prices.…”

“…Similar to Jiang, Kumar, and Ratchford (2016), I allow for heterogeneity in search costs before and after purchase. A fraction l of consumers have zero prepurchase search cost ("shoppers").…”

“…First, consumers may have different search costs pre- and postpurchase. This feature is also present in the model of Jiang, Kumar, and Ratchford (2016). The fact that consumers who have high search cost prepurchase may have low search cost postpurchase captures the idea that some consumers may be time constrained at the moment of purchase but may have some free time later to search for a better deal.…”

“…A PMG allows consumers a grace period in which they can search after purchase. As Jiang, Kumar, and Ratchford (2016) argue, a grace period to exercise the PMG enables consumers to defer search to when their search costs are low.…”