Interaction between manufacturer's wholesale pricing and retailers' price‐matching guarantees

Abstract

In practice, many retailers employ price‐matching guarantees (PMGs), committing to meet the price of an identical product at a competitor's outlet. Despite the profound linkage between retailers and manufacturers, existing literature has predominantly explored retailers' PMGs without contemplating the influence of manufacturers' wholesale pricing strategies. Employing a supply chain model comprising one manufacturer and two retailers, we scrutinize the implications of wholesale pricing—uniform or discriminatory—on supply chain members and consumers when retailers have the option to extend PMGs. Our analysis uncovers that retailers refrain from offering PMGs when the manufacturer is granted the discretion to set discriminatory wholesale prices—even if such offers align with the manufacturer's preferences. Conversely, under uniform wholesale pricing, PMGs thrive at equilibrium—even if the manufacturer opposes the practice—as long as the degree of demand or cost asymmetry between retailers and average hassle costs remains relatively modest. Although firms' preferences regarding PMGs vary, a Pareto zone exists where all entities prefer that either the efficient retailer under demand asymmetry or the inefficient retailer under cost asymmetry extends the PMG. Despite the potential advantages of PMGs for the more efficient retailer, the enforcement of uniform wholesale pricing diminishes supply chain profit, consumer welfare, and overall social welfare. The detrimental impacts on welfare owing to the imposition of uniform wholesale pricing persist, even amid the presence of hassle costs associated with price matching. Our findings thus instigate a dialogue for policymakers concerning the validity of regulating wholesale pricing when PMGs are in effect.