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Price Matching by Vertically Differentiated Retailers: Theory and Evidence

This research examines vertically differentiated retailers' incentives to offer price-matching guarantees. It suggests that offering and not offering a price-matching guarantee are both signals of a retailer's service-price profile, a way of branding the retailer to uninformed consumers. The signals are made credible and costless by the presence of informed consumers. The authors show that when the service differentiation is large enough, only low-service retailers offer price-matching guarantees.

Data from a sample of Canadian retail chains support this prediction. In addition, larger retail chains are more likely to offer price-matching guarantees than smaller chains, and competition has an interactive effect with service. As the intensity of competition a chain faces increases, lower-service retailers are even more likely to use a guarantee, and higher-service retailers are less likely to do so, suggesting that price-matching guarantees are competitive tools, not collusive tools, as the literature has often implied.

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