Measuring the competition effects of price-matching guarantees

Samir Mamadehussene*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

The theoretical literature on price-matching guarantees (PMGs) finds that this policy has both a competition-softening and a competition-enhancing effect. Which effect dominates depends on market structure. This paper is the first to propose a structural framework to measure the impact of PMGs on market competition through a counterfactual analysis. The structural model proposed here can be estimated using price data alone. I estimate the model using data from the automotive tire market, and I find that the competition-softening effect is stronger than the competition-enhancing effect. PMGs keep transaction prices between 1% and 8% higher than they would be in the absence of such policy. PMGs exert the strongest effect on price-sensitive consumers, who tend to be the poorest. This consumer segment pays up to 10% higher prices in the presence of PMGs. The tire market has some unique features that facilitate the competition-enhancing effect of PMGs. Hence, that the competition-softening effect dominates even in the tire market suggests that PMGs may increase prices in many other markets, too.
Original languageEnglish
Pages (from-to)261-287
Number of pages27
JournalQuantitative Marketing and Economics
Volume19
Issue number3-4
DOIs
Publication statusPublished - Dec 2021
Externally publishedYes

Keywords

  • Competition effects
  • Counterfactual analysis
  • Price-matching guarantees

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