Price-Matching Guarantees as a Direct Signal of Low Prices

Abstract

If consumers believe that stores offering price-matching guarantees (PMGs) charge low prices, high-search-cost consumers will purchase from PMG stores. This leads PMG stores’ demand to be less price sensitive, which drives these stores to charge higher prices. The belief that PMG stores charge low prices paradoxically leads them to charge high prices. For this reason, the literature finds that PMGs can only signal low prices when firm heterogeneity is sufficiently large. Because PMGs are offered by retailers that purchase the same product from the same producer, large firm heterogeneity may be a strong assumption. This article proposes a theory that explains how homogeneous firms may signal their low prices through PMGs: consumers perceive PMG stores to have lower prices not because they expect them to have low marginal costs or service quality, but simply because they offer a PMG.

Assessing the Impact of Price-Matching Guarantees and Price Fluctuations on Consumer Feedback: Insights from the Online Consumer Electronics Market

“…It is worth noting that the signalling theory has been utilized also to argue the price-signalling nature of PMGs. In particular, a number of authors have proposed the idea that PMGs are likely to be signals of unobservable prices that can lead to a market equilibrium in which only low-marginal costs firms apply the policy [Jain and Srivastava, 2000, Moorthy and Winter, 2006, Moorthy and Zhang, 2006, Mamadehussene, 2019.…”

“…Hay, 1981, Salop, 1986, Belton, 1987; differently, some other works have predicted that these policies can be price-discriminating devices [Png and Hirshleifer, 1987, Corts, 1997, Nalca et al, 2010. In a signalling theoretical environment, instead, some scholars have alleged that consumers are likely to associate PMGs with low store prices, thus being influenced in their price perceptions and enticed to make purchases from sellers who offer the guarantee [see Srivastava and Lurie, 1999, Jain and Srivastava, 2000, Srivastava and Lurie, 2001, 2004, Moorthy and Winter, 2006, Dutta et al, 2007, Mamadehussene, 2019. Indeed, once a firm implements an PMG, the policy is likely to be maintained for an extended period of time, as opposed to seller price changes, which can occur frequently in an online market.…”

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

“…Srivastava and Lurie (2004) empirically study the conditions necessary for PMGs to effectively signal low prices (e.g., buyers' opportunity cost of time, proximity, and density of stores). Moorthy and Winter (2006) and Mamadehussene (2018) underscore the ability of PMGs to signal a retailer's low-cost or high-quality positioning to consumers who are not informed about prices and for whom obtaining comparative price information is costly.…”

Prominent Retailer and Intrabrand Competition

“…Our research also connects to the broader consumer search literature (see, e.g., Anderson and Renault 1999;Diamond 1971;Dukes and Zhu 2019;Janssen, Moraga-Gonzalez, and Wildenbeest 2005;Janssen and Shelegia 2015;Jiang, Kumar, and Ratchford 2017;Ke and Lin 2020;Kuksov 2004;Lal and Sarvary 1999;McCall 1970;Stahl 1989;Stigler 1961;Weitzman 1979;Wolinsky 1986;Zhong 2020;Zhu and Dukes 2017;Zou and Jiang 2020). Within this large and diverse literature, our work is most closely informed by the ordered-search stream (e.g., Arbatskaya 2007;Armstrong, Vickers, and Zhou 2009;Armstrong and Zhou 2011;Astorne-Figaria and Yankelevich 2014;Cao and Zhu 2020;Choi, Dai, and Kim 2018;Janssen and Ke 2020;Mamadehussene 2019;Petrikaitė2018;Wilson 2010;Xu, Chen, and Whinston 2011). Here, instead of randomly sampling from the available options, customers search in a deliberate sequence, visiting certain firms early in the sequence, thus advantaging those firms.…”