Price-matching guarantees as a direct signal of low prices

If consumers believe that stores offering price-matching guarantees (PMGs) charge low prices, high-search-cost consumers will purchase from PMG stores. This leads PMG stores’ demand to be less price sensitive, which drives these stores to charge higher prices. The belief that PMG stores charge low prices paradoxically leads them to charge high prices. For this reason, the literature finds that PMGs can only signal low prices when firm heterogeneity is sufficiently large. Because PMGs are offered by retailers that purchase the same product from the same producer, large firm heterogeneity may be a strong assumption. This article proposes a theory that explains how homogeneous firms may signal their low prices through PMGs: consumers perceive PMG stores to have lower prices not because they expect them to have low marginal costs or service quality, but simply because they offer a PMG.