Quantity precommitment and price-matching

Abstract

We revisit the question of whether price matching is anti-competitive in a capacity constrained duopoly setting. We show that the effect of price matching depends on capacity. Specifically, price matching has no effect when capacity is relatively low, but it benefits the firms when capacity is relatively high. Interestingly, when capacity is in an intermediate range, price matching benefits only the small firm but does not affect the large firm in any way. Therefore, one has to consider capacity seriously when evaluating if price matching is anti-competitive.If the firms choose their capacities simultaneously before pricing decisions, then the effect of price matching is either pro-competitive or ambiguous. We show that if the cost of capacity is high, then price matching can only (weakly) decrease the market price. On the other hand, if the cost of capacity is low, then the effect of price matching on the market price is ambiguous due to the multiplicity of equilibria. Therefore, this paper challenges the widely accepted belief that price matching is an anti-competititive practice if the firms choose their capacities simultaneously before pricing decisions.

The Collusive Efficacy of Competition Clauses in Bertrand Markets with Capacity-Constrained Retailers

“…That is, both retailers have the same market share in this case regardless of their shares of the total capacity. The same holds for the model of Tumennasan (2013), which is based on the framework of Kreps and Scheinkman (1983).…”

“…To the best of our knowledge, the only other paper which has so far examined the collusive efficacy of CCs in markets with capacity-constrained retailers is the one of Tumennasan (2013). It rests on the two-stage duopoly framework proposed by Kreps and Scheinkman (1983); the retailers choose their sales capacities in the first stage and fix the commodity prices in the second stage.…”

“…It rests on the two-stage duopoly framework proposed by Kreps and Scheinkman (1983); the retailers choose their sales capacities in the first stage and fix the commodity prices in the second stage. The novel feature in the model of Tumennasan (2013) is that in the second stage, each duopolist has the additional option to implement the MCC. The results of the paper are mixed.…”

“…The approach we pursue deviates substantially from the one of Tumennasan (2013). First, the forms of the CC rather than the sales capacities are endogeneized in our paper; the sales capacities of the retailers are assumed to be invariable for an indefinite period of time and are taken as constant.…”

“…Besides that, most parts of our analysis do not rely on a specific rationing rule. Instead of assuming efficient rationing as Tumennasan (2013) did, we only require that the rationing rule have some (less contentious) properties which are satisfied by any prominent rationing rule such as the efficient or the proportional rule. 1 This generality enables us to go beyond the fundamental question whether CCs could be used to enforce collusion.…”