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Do Price-Matching Guarantees with Markups Facilitate Tacit Collusion? Theory and Experiment

Andreas Pollak

No 93, Working Paper Series in Economics from University of Cologne, Department of Economics

Abstract: This paper studies how competitive prices are affected by price-matching guarantees allowing for markups on the lowest competing price. This new type of low-price guarantee was recently introduced in the German retail gasoline market. Using a sequential Hotelling model, we show that such guarantees, similar to perfect price-matching guarantees, can induce collusive prices. In particular, this occurs if the first mover provides a price guarantee with a markup which is below a threshold value. In these cases, prices are on average set at the monopoly level. A laboratory experiment supports the theoretical predictions.

Date: 2017-03-01
New Economics Papers: this item is included in nep-com and nep-exp
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