An Analysis of Price Matching Policy

Abstract

Price matching policies have been widely adopted in retailing and other industrial markets. The flourishing online channels have made price comparison and matching much easier. Previous research on price matching policy focuses on how this policy impacts the competition among sellers based on simultaneous pricing games. However, besides the role to match the competitors' current price during a purchase (i.e. concurrent price matching), price matching policy usually has another role: to match a seller's own price or the competitors' price if the price drops within a specified period after the purchase (i.e. posterior price matching). This role has important implication for consumers' purchasing behavior. Rational consumers may delay purchasing, hoping for possible markdowns that come later. This delayed purchasing behavior, however, may harm a seller's profit. Posterior price matching allows a seller to induce early purchasing of buyers. This is because with a guarantee to match the lower price that may be offered by the seller later, a buyer cannot gain by waiting. On the other hand, posterior price matching reduces a seller's pricing power, and also changes a seller's pricing strategy over time, influencing a buyer's utility. Therefore whether or not posterior price matching benefits sellers or buyers deserve a close examination. In this paper, we present an analytical model that investigates the impact of posterior price matching on both the buyers' utility and the seller's revenue in three scenarios: (1) the seller is a monopolist in the market; (2) the seller is a semi-monopolist in the market, i.e., he is a monopolist in the first period, but the market is perfectly competitive and he has no pricing power in the second period; and (3) the seller is a price-taking seller, i.e., the market is perfectly competitive, in both periods. We find that in scenario 1 a price matching policy is beneficial for the seller but makes the buyers worse off. However, in scenario 2 and 3, we find that there exists a wide range of situations where a price matching policy surprisingly can benefit both parties.