http://www.leaonline.com/doi/pdf/10.1207/S15327663JCP1303_07

In class, we have studied the fundamentals of game theory and several real-world situations which have been analyzed and/or predicted with game theory. In the article, Failing to Suspect Collusion in Price-Matching Guarantees: Consumer Limitations, Chatterjee, Heath, and Basuroy describe their experiment where they investigated how effectively consumers recognized collusive situations in retail environments.

Price Match Guarantees (PMGs) are the devices which game theory predicts to be collusive. A PMG is a store policy which entitles a customer to a refund of the difference between the store’s asking price and a competitor’s price.

The article describes multiple market situations involving PMGs.

1)      In a hypothetical market – say two electronic retailers, store A and store B – where neither store offers a PMG, they will each compete on the basis of prices and, due to competition, the prices will reach a low Nash equilibrium.

2)      In another situation involving the same market, one of the stores offers a PMG and the other does not. Now if the PMG store lowers its prices, the non-PMG store will also lower its prices. However, if the non-PMG store lowers prices, the PMG store need not lower its prices because consumers will still have the lower price available to them through the PMG. This allows the PMG store to maximize its profit from customers who are not as price-sensitive while keeping price-sensitive customers.

3)      In the last situation, both stores institute PMG. As stated in #2, a PMG store loses its incentive to lower prices to compete. In the case that both stores involved have PMGs, the stores need not worry about the other store lowering prices, so they do not lower their own prices either. The article sees this situation to mimic collusive pricing behavior.

The experiment that the article describes examines whether consumers interpret a PMG as an indication of low prices and whether they detect a collusive situation. They found that many consumers did indeed lower their price sensitivity in response to a PMG and most consumers did not detect collusive pricing.

These findings suggest that government consumer protection with regard to Price Match Guarantees may be necessary. The two largest consumer electronics retailers in the country, Best Buy and Circuit City, both have a type of Price Match Guarantees – a price-beat guarantee – and these sort of policies seem to be cropping up all over the place. Next time you’re making a purchase from a store offering a PMG, buyer beware, that policy which guarantees low prices may be responsible for raising prices!