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Journal Article

Competitive price-matching guarantees: Equilibrium analysis of the availability verification clause under demand uncertainty

Management Science 59 (4): 971–986
Arcan Nalca, Tamer Boyaci, Saibal Ray (2013)
Subject(s)
Product and operations management
Keyword(s)
Price-matching guarantees, inventory, availability, stochastic demand, pricing, verification of availability
Price-matching guarantees involve a retailer matching the lower price of a competitor for an identical product. In reality, retailers often make such guarantees contingent on the verification of product availability at the competitor's location, and decline a price-match request if the product is not available there. This creates certain consternation on the part of customers. In this paper, we investigate the availability contingency strategy from the perspectives of both the retailers and the customers. Our analysis shows that availability contingency clauses intensify inventory competition between retailers and reinstitutes price ompetition, which is otherwise eliminated by unconditional price-matching guarantees. Consequently, despite what customers may think about the availability verification, it actually increases their surplus. On the other hand, such a clause reduces profits and, hence, is not the equilibrium strategy for retailers. Subsequently, we discuss how a likely customer behaviour pattern may be a plausible explanation regarding the use of the clause by the retailers in practice.
© 2013 INFORMS
Volume
59
Journal Pages
971–986