Group for Research in Decision Analysis


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

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This paper 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).<\p>

We first develop a horizontal price competition model where two retailers offer PMGs to analyze PM and PMA policies. 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.

Our analysis reveals that for both price-matching policies, and especially for PMA, the issue of product availability significantly impact the values and behavior of the equilibrium decisions. The precise effect of availability is crucially linked to two factors: the relative \textit{sizes}, and \textit{reservation prices}, of uninformed and informed customer segments in the market. For example, whether the uninformed or the informed segment is willing to pay more determines whether the intensity of horizontal competition (as measured by equilibrium retail prices), as well as the intensity of vertical competition (as measured by the degree of double marginalization), will increase or decrease with availability. Moreover, a comparison of the willingness-to-pay between the two customer segments establishes whether verifying availability (i.e., PMA) results in increased or decreased competitive intensities. We characterize how the retail and wholesale prices change with respect to the level of in-store availability and its verification under different conditions. Under the two price-matching policies, a profit comparison shows that the retail firm prefers PM over PMA when there are relatively more uninformed customers in the market and the availability is high, and vice versa. The manufacturer, on the other hand, always prefers the PM policy.

, 44 pages