An Experimental Examination of Competitor-Based Price

Matching Guarantees

Shakun Datta

(joint work with Jennifer Offenberg)

29th June 2007

Price Matching Debate

Pro-competitive v/s Pro-collusion

■ Consumers regard price matching policies as a “heuristic for low prices” (Chatterjee, Roy, 1997)

■ “Adopting a guaranteed-low-price policy is a good substitute for actually having low prices…” (Edlin and Emch,1999)

Experimental studies indicate that Price Matching guarantees

acts a collusion facilitating device when seller costs are

symmetric.

Our research question: Does asymmetry in costs affect the

viability of PM guarantees as a collusion facilitating device?

Homogeneous goods duopoly market

Sellers simultaneously choose a posted price pi and a price policy - PM or NPM.

■ Set price every round but policy decision only every 4 rounds■ 8 subjects per session - Randomly re-matched every 4 rounds

n (= 10) consumers are fully informed of prices and policies of both sellers.

Consumers purchase at most one unit of the good at the lowest price equal to or below their reservation value r (= $10).

Theoretical Model

Symmetric Cost

c = 5 (Price = 10)

Seller 2

Seller 1

Payoff matrixPM No PM

PM 25, 25 0, 0

No PM 0, 0 0, 0

No PM-PM-No PM Treatment: Symmetric Cost Market Transaction Price

Averaged across 4 duopolies per session

0

1

2

3

4

5

6

7

8

9

10

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55

Round

Ave

rag

e P

rice

($)

Session 1A

Session 1B

Session 2A

Session 2B

Cost(Competitive Prediction)

Reservation Value(Collusive Prediction)

Option to match pricesNo Price Matching No Price Matching

Asymmetric Cost – Small difference

cl = 2 ch1 = 5 (Price = 10)

High cost seller

Low cost

seller

Payoff matrixPM No PM

PM 40, 25 29.9, 0

No PM 15, 0 29.9, 0

Asymmetric Cost – Large difference

cl = 2 ch2 = 8 (Price = 7.99 or 10)

High cost seller

Low cost seller

Payoff matrixPM No PM

PM 40, 10 59.9, 0

No PM 30, 0 59.9, 0

No PM-PM-PM: Asymmetric Costs Market Transaction Price

Averaged across four duopolies per session

0

1

2

3

4

5

6

7

8

9

10

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64

Round

Av

era

ge

Pri

ce

($

)

Session 5A

Session 5B

Session 6A

Session 6B

Low Cost

Reservation Value(Collusive Prediction)

High Cost(Competitive Prediction)

No Price Matching Option to match prices

Dual Cost Session – 2/5 - 2/5 - 2/8

Dual Cost Session – 2/8 - 2/8 - 2/5

No PM-PM-PM: Asymmetric Costs Market Transaction Price

Averaged across four duopolies per session

0

1

2

3

4

5

6

7

8

9

10

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64

Round

Av

era

ge

Pri

ce

($

)

Session 7A

Session 7B

Session 8A

Session 8B

Low Cost

Reservation Value(Collusive Prediction)

High Cost(Competitive Prediction)

Option to match pricesNo Price Matching

2

3

4

5

6

7

8

9

10

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64

Round

Ave

rage

Pri

ce ($

)

S17 S18 S19 S20

Low Cost

Reservation Value(Collusive Prediction)

High Cost(Competitive Prediction)

NPM PM

“Single” Small Cost Asymmetry Sessions – 2/5

2

3

4

5

6

7

8

9

10

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64

Round

Ave

rage

Pri

ce ($

)

S21 S22 S23 S24

Low Cost

Reservation Value(Collusive Prediction)

High Cost(Competitive Prediction)

NPM PM

“Single” Large Cost Asymmetry Sessions (2/8)

83.6

93.9

74.2

78.0

71.8

86.5

51.6

55.7

0

20

40

60

80

100

Dual cost sessions Single Cost sessions Dual cost sessions Single Cost sessions

Perc

en

tag

e

Low cost seller

High cost seller

Adoption of PM guarantees

(c1 = 2 and ch1 = 5) (c1 = 2 and ch2 = 8)

Conclusion

When costs are symmetric, price matching guarantees act as a facilitation device for collusion. Prices are higher than the competitive level.

When costs are asymmetric, differential gains affect their collusive ability. Less use of guarantees Lower average price Slower convergence to reservation price

Adoption of Price Guarantees by high cost seller (ch2 = 8) Non adoption - 46%

Guarantee adoption exposes them to the risk of being undercut by the low cost seller and earning negative profit.

Adoption - 54% Repeated game strategies: Evidence of positive impact of

adoption rates on the low cost seller’s incentive to cooperate

Profit for the high cost seller is positive only in case of collusion. Observed play in the finite horizon is similar to one-shot game (37%).

Adoption of Price Guarantees

Use of price guarantees is significantly lower in case of large cost asymmetry.

Low cost sellers adopt price matching guarantees more often than the high cost sellers, irrespective of the level of high cost.

High cost sellers are much less likely to adopt price guarantees when the cost asymmetry is large than when the cost asymmetry is small.

Irrespective of level of cost asymmetry, prices in the PM treatment are higher than prices in the NPM treatment.

■ All 8 sessions of small cost asymmetry■ 9 out of 10 sessions of large cost asymmetry.

PM prices in the small cost asymmetry treatment (c1

= 2 and ch1 = 5) are not different from PM prices in the

large cost asymmetry treatment (c1 = 2 and ch2 = 8)

■ The average market price in the small and large cost asymmetry is $8.55 and $8.46, while the average price in sequence 2 and 3 is $7.94 and $9.12.

■ Prices in sequence 2 are significantly lower than prices in sequence 3.

■ Holds for both “dual” and “single” cost sessions.

PM prices in the small cost asymmetry treatment (c1

= 2 and ch1 = 5) are closer to the collusive outcome

than to the competitive outcome.

■ The average deviation from the competitive equilibrium is 3.67 times the average deviation from the collusive equilibrium.

PM prices in the large cost asymmetry treatment (c1

= 2 and ch2 = 8) lie further away from the collusive

outcome than from the competitive outcome.

■ The average deviation of the observed price from the collusive level (1.47) is greater than from the competitive level (0.97).