Skip to main content
SpringerLink
Log in

Are low-price promises collusion guarantees? An experimental test of price matching policies

  • Regular Article
  • Published:
Spanish Economic Review

Abstract

In a symmetric differentiated experimental duopoly we test the ability of Price Matching Guarantees (PMG) to raise prices above the competitive levels. PMG are introduced both as a market rule (the selling price is always the lowest posted price) and as a business strategy (subjects decide whether or not to offer them). Our results show that PMG lead to a clear collusive outcome as markets quickly and fully converge to the collusive prediction if PMG are imposed as a market rule. Whenever subjects are allowed to decide whether to adopt PMG or not we observe that almost all subjects decide to adopt them and prices get very close to the collusive ones.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Arbatskaya M, Hviid M, Shaffer G (1999) Promises to match or beat rival prices. In: Baye M (ed) Advances in applied microeconomics, vol 8. JAI Press Inc, Greenwich, pp 149–171

    Google Scholar 

  • Arbatskaya M, Hviid M, Shaffer G (2004) On the incidence and variety of low price guarantees. J Law Econ XLVII:307–332

    Article  Google Scholar 

  • Baye MR, Kovenock D (1994) How to sell a pickup truck: ‘Beat-or-Pay’ advertisements as facilitating devices. Int J Ind Organ 12:21–33

    Article  Google Scholar 

  • Belton M (1987) A model of doupoly and meeting or beating the competition. Int J Ind Organ 5:399–417

    Article  Google Scholar 

  • Benson B, Faminow ML (1988) The impact of experience on prices and profits in experimental dupoly markets. J Econ Behav Organ 9:345–365

    Article  Google Scholar 

  • Broseta B, Fatas E, Neugebauer T (2003) Asset markets and equilibrium selection in public goods games with provision points: an experimental study. Econ Inq 41(3):574–591

    Article  Google Scholar 

  • Capra M, Goeree JK, Gómez R, Holt CA (2002) Learning and noisy equilibrium behaviour in an experimental study of imperfect price competition. Int Econ Rev 43(3):613–636

    Article  Google Scholar 

  • Corts KS (1995) On the robustness of the argument that price matching is anti-competitive. Econ Lett 47:417–421

    Article  Google Scholar 

  • Corts KS (1996) On the competitive effects of price matching policies. Int J Ind Organ 15:283–299

    Article  Google Scholar 

  • Croson R, Fatas E, Neugebauer T (2005) Reciprocity, matching and conditional cooperation in two public goods games. Econ Lett 87:95–101

    Article  Google Scholar 

  • Davis DD, Holt CA (1993) Experimental economics. Princeton University Press, Princeton

    Google Scholar 

  • Deck CA, Wilson B (2003) Automated pricing rules in electronic posted offer markets. Econ Inq 41(2):208–223

    Article  Google Scholar 

  • Dixit A, Nalebuff B (1991) Thinking strategically. W.W. Norten & Company, Inc., New York

    Google Scholar 

  • Doyle C (1988) Different selling strategies in Bertrand oligopoly. Econ Lett 28:387–390

    Article  Google Scholar 

  • Dufwenberg M, Gneezy U (2000) Price competition and market concentration: an experimental study. Int J Ind Organ 18:7–22

    Article  Google Scholar 

  • Edlin A (1997) Do guaranteed-low price policies guarantee high prices, and can antitrust rise to the challenge?. Harv Law Rev 111:528–575

    Google Scholar 

  • Edlin A, Emch E (1999) The welfare losses from price-matching policies. J Ind Econ 47(2):145–167

    Google Scholar 

  • Fatas E, Georgantzís N, Mañez J, Sabater G (2005) Pro-competitive price beating guarantees. Experimental evidence. Rev Ind Organ 26:115–136

    Article  Google Scholar 

  • Fatas E, Neugebauer T, Perote J (2006) Within team competition in the minimum game. Pac Econ Rev 11(2):247–270

    Article  Google Scholar 

  • Fischbacher U (1999) z-Tree: Zurich toolbox for readymade economic experiments – experimenter’s manual. Working paper number. 21, Institute for Empirical Research in Economics, University of Zurich

  • Friedman JW, Hoggatt AC (1980) An experiment in non-cooperative oligopoly, Research in Experimental Economics, vol 1. supplement JAI Press, Greenwich

    Google Scholar 

  • Garcia-Gallego A, Georgantzis N (2001) Multiproduct activity in an experimental differentiated oligopoly. Int J Ind Organ 19:493–518

    Article  Google Scholar 

  • Hess J, Gerstner E (1991) Price matching policies: an empirical case. Manage Decis Econ 12:305–315

    Google Scholar 

  • Hviid M, Shaffer G (1994) Do low price guarantees facilitate tacit collusion? University of Michigan working paper, 94–02

  • Hviid M, Shaffer G (1999) Hassle costs: the Achilles’ heel of price-matching guarantees. J Econ Manage Strat 8:489–521

    Article  Google Scholar 

  • Holt C (1995) Industrial organization: a survey of laboratory research. In: Kagel JH, Roth AE (eds) Handbook of experimental economics. Princeton University Press, Princeton

  • Jain S, Srivastava J (2000) An experimental and theoretical analysis of price-matching refund policies. J Mark Res 37:351–362

    Article  Google Scholar 

  • Kaplan T (2000) Effective price-matching: a comment. Int J Ind Organ 18:1291–1294

    Article  Google Scholar 

  • Logan J, Lutter R (1989) Guaranteed lowest prices: do they facilitate collusion? Econ Lett 31:189–192

    Article  Google Scholar 

  • Mañez JA (2006) Unbeatable value low-price guarantee: collusive mechanism or advertising strategy. J Econ Manage Strat 15:143–166

    Article  Google Scholar 

  • Milyo J, Waldfogel J (1999) The effects of price advertising on prices: evidence on the wake of 44 Liquormart. Am Econ Rev 89:1081–1096

    Article  Google Scholar 

  • Moorthy S, Winter RA (2002) Price-matching guarantees. Review of marketing science working papers, vol 2, No. 1, Article 2. http://www.bepress.com/roms/vol2/iss1/paper2

  • Plott C (1982) Industrial organization theory and experimental economics. J Econ Lit 20:1485–1527

    Google Scholar 

  • Plott C (1989) An updated review of industrial organization: applications of experimental methods. In: Schmalensee R, Willig R (eds). Handbook of industrial organization, vol II. North-Holland, New York

    Google Scholar 

  • Png IPL, Hirschleifer D (1987) Price discrimination through offers to match price. J Bus 60:365–383

    Article  Google Scholar 

  • Salop S (1986) Practices that (credibly) facilitate oligopoly coordination. In: Stiglitz J, Mathewson F. (eds). New developments in the analysis of market structure. MIT Press, Cambridge

  • Sargent M (1993) Economics upside-down: low price guarantees as mechanism for facilitating tacit collusion. Univ PA Law Rev 141:2055–2118

    Google Scholar 

  • Smith MD, Bailey J, Brynjolfsson E (1999) Understanding digital markets. In: Brynjolfsson E, Kahin B (eds) Understanding the digital economy, MIT Press, Cambridge

  • Srivastava J (2001) A consumer perspective on price matching refund policies: effect on price perceptions and search behaviour. J Consum Res 28(2):296–308

    Article  Google Scholar 

  • Srivastava J, Lurie N (2004) Price matching refund policies as signals of store price image?. J Retail 80:117–128

    Article  Google Scholar 

  • Van Huyck J, Battalio R, Beil R (1990) Tacit coordination games, strategic uncertainty, and coordination failure. Am Econ Rev 80:234–248

    Google Scholar 

  • Zhang J (1995) Price-matching policy and the principle of minimum differentiation. J Ind Econ 43:287–299

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. LINEEX and University of Valencia, Valencia, Spain

    Enrique Fatas & Juan A. Mañez

Authors
  1. Enrique Fatas
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Juan A. Mañez
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Enrique Fatas.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Fatas, E., Mañez, J.A. Are low-price promises collusion guarantees? An experimental test of price matching policies. SpanEconRev 9, 59–77 (2007). https://doi.org/10.1007/s10108-006-9012-0

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10108-006-9012-0

Keywords

JEL Classification

Search

Navigation