Price‐matching guarantees

Abstract

Are price‐matching guarantees anticompetitive? We examine the incentives for price‐matching guarantees in markets where information about prices is costly. The conventional explanation of price matching as facilitating cartel pricing finds some theoretical support, but our model provides an additional explanation. A price‐matching guarantee may be a credible and easily understood means of communicating to uninformed consumers that a firm is low priced. The credibility of the signal is assured by the behavior of informed consumers. We contrast the testable implications of our model with those arising from two theories of price matching as anticompetitive, and show that available evidence supports the signalling theory .