Group for Research in Decision Analysis

Competitive Price Matching Guarantees in a Decentralized Channel: Role of In-store Availability and Its Verification

Arcan Nalca Queen's Smith School of Business, Canada

This study investigates the effects of in-store availability on price matching guarantees (PMGs). Under the simplest form of PMG implementation, a firm matches the lower price offered by a competitor store for an identical product, whenever a customer presents a credible proof of such a lower price (price matching, PM). In reality, however, firms reserve the right to check the availability of the product at the competitor location. If the product is not available there, then the firm might decline to match the lower price, and offer its own list price to the customer (price matching based on availability, PMA). We develop a horizontal price competition model where two retailers offer PMGs to analyze PM and PMA policies.

In our initial model there are two customer segments in the market: uninformed customers who have no information about market prices or store characteristics, and informed customers who are knowledgeable about both. All customers visit first her/his preferred store. Only if the price is high or if the product is not available do they switch to the competitor store. We derive and compare the equilibrium prices and profits under PM and PMA policies. We then extend the horizontal framework to incorporate a manufacturer which supplies the product to the two competing retailers. This enables us to simultaneously analyze vertical competition (i.e., double marginalization) between the manufacturer and the retailers, and horizontal price competition between the retailers. In addition, we derive and compare the equilibrium prices and profits for all channel partners in this setting.

In our second model, we extend the framework to investigate the decisions of retailers on price and in store availability simultaneously. In this case, we consider two retailers that face an uncertain (price sensitive) demand and decide on the price and inventory levels. Visiting behavior of the customers remain the same, however we include only the informed customer segment in our analysis. Modeling details and preliminary results of this second study will also be discussed in the presentation.