Competitive Price-Matching Guarantees: Equilibrium Analysis of the Availability Verification Clause Under Demand Uncertainty

Arcan Nalca (), Tamer Boyaci () and Saibal Ray ()
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Arcan Nalca: School of Business, Queen's University, Kingston, Ontario K7L 3N6, Canada
Tamer Boyaci: Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada
Saibal Ray: Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada

Management Science, 2013, vol. 59, issue 4, 971-986

Abstract: Price-matching guarantees involve a retailer matching the lower price of a competitor for an identical product. In reality, retailers often make such guarantees contingent on the verification of product availability at the competitor's location, and decline a price-match request if the product is not available there. This creates certain consternation on the part of customers. In this paper, we investigate the availability contingency strategy from the perspectives of both the retailers and the customers. Our analysis shows that availability contingency clauses intensify inventory competition between retailers and reinstitutes price competition, which is otherwise eliminated by unconditional price-matching guarantees. Consequently, despite what customers may think about the availability verification, it actually increases their surplus. On the other hand, such a clause reduces profits and, hence, is not the equilibrium strategy for retailers. Subsequently, we discuss how a likely customer behaviour pattern may be a plausible explanation regarding the use of the clause by the retailers in practice. This paper was accepted by Yossi Aviv, operations management.

Keywords: price-matching guarantees; inventory; availability; stochastic demand; pricing; verification of availability (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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