competitive coupon targeting with the advent of panel data on household purchase behavior and the development of statistical procedures to utilize this data firms can now target coupons to selected households with considerable accuracy and cost effectiveness in this article we develop an analytical framework to examine the effect of such targeting on firm profits prices and coupon face values we also derive comparative statics on firms optimal mix of offensive and defensive couponing the number of coupons distributed redemption rates face values and incremental sales per redemption among our findings when rival firms can target their coupon promotions at brand switchers the outcome will be a prisoner s dilemma in which the net effect of targeting is simply the cost of distribution plus the discount given to redeemers

why voluntary export restraints are voluntary the paper presents an analysis of the effect upon an oligopolistic equilibrium of introducing a voluntary export restraint ver upon an importing firm a ver set at the free trade level of imports is shown to raise the profits of all firms within the industry the result follows as the imposition of a ver upon a free trade nash price competition forces the domestic firm to become an industry price leader the ver raises industry prices by facilitating collusion and lowers consumer welfare pourquoi les restrictions volontaires d 1 exportation sont volontaires ce memoire presente une analyse des effets de l introduction de restrictions volontaires a l exportation rve sur une entreprise qui importe dans un monde en equilibre oligopolistique on montre que l introduction de rve approximant le niveau des importations en regime de libre echange devrait augmenter les profits de toutes les entreprises dans l industrie cela decoule du fait que l imposition de rve sur un univers de concurrence par les prix a la nash en regime de libre echange force l entreprise domestique a devenir le leader en prix l introduction de rve augmente le niveau des prix de l industrie en facilitant la collusion et de ce fait reduit le niveau de bien etre des consomrnateurs

quantitative restrictions and the welfare effects of capital inflows abstract this paper explores the welfare effects of capital inflows when some imports are subject to quantitative restrictions it is shown that in a heckscher ohlin model where all imports are restricted by quotas and some fraction of the initial domestic capital stock is foreign owned a capital inflow is welfare improving regardless of the ranking of sectoral factor intensities with sector specific capital stocks and both tariff ridden and quota restricted imports the consequences of direct foreign investment in any sector are uncertain and depend upon whether the two imports are compensated substitutes or complements as well as the characteristics of production

risk aversion exchange rate uncertainty and the law of one price insights from the market for online air travel tickets we argue that risk aversion driven by exchange rate uncertainty causes a wedge between the domestic and foreign prices of a homogeneous good we test our hypothesis using a unique micro data set from a market with minimum imperfections the empirical findings validate our hypothesis as accounting for exchange rate uncertainty we are able to explain a significant proportion of deviations from the law of one price overall our analysis suggests the possibility of a new solution to the purchasing power parity puzzles

why do manufacturers issue coupons an empirical analysis of breakfast cereals we explore the relationship between shelf prices and manufacturers coupons for 25 readyto eat breakfast cereals we find that shelf prices are lower during periods when coupons are available this result is inconsistent with static monopoly price discrimination under a broad range of assumptions we present evidence that is inconsistent with both dynamic theories of price discrimination and explanations of couponing based on the vertical relationship between manufacturers and retailers we find support for models of price discrimination in oligopoly settings as well as suggestions that firmwide incentives may induce managers to use coupons and price cuts simultaneously finally lagged coupons have a positive effect on current sales suggesting that coupons are used to induce repurchase

does competition reduce price dispersion new evidence from the airline industry we analyze the effects of competition on price dispersion in the airline industry using panel data from 1993 q1 through 2006 q3 competition has a negative effect on price dispersion in line with the textbook treatment of price discrimination this effect is pronounced for routes with consumers characterized by relatively heterogeneous elasticities of demand on routes with a homogeneous customer base the effects of competition on price dispersion are smaller our results contrast with those of borenstein and rose who found that price dispersion increases with competition we reconcile the different results by showing that the cross sectional estimator suffers from omitted variable bias

price discrimination in the airline market the effect of market concentration we test the hypothesis that price discrimination increases with competition in the airline market using a large cross section of tickets offered by several carriers on various routes we approximate price discrimination with marginal implicit prices of ticket restrictions that carriers typically use to price discriminate saturday night stayover re quirements and advanced purchase discounts we find that the restrictions are associated with lower airfares but that the discounts are smaller on routes with higher market concentration the results suggest that price dispersion attributed to ticket restrictions increases as markets becomemore competitive

price discrimination in free entry markets using a spatial model of monopolistic competition we investigate price discrimination in free entry zero profit markets we show that when brands are heterogeneous competition does not prevent discrimination the power to earn economic profits is not necessary for a firm to maintain discriminatory prices our model treats formally the fact that consumers difer not only in the utility they derive from a good but also in how strongly they prefer one brand over all others in markets where firms are very competitive sorting consumers on the strength on brand preference produces larger price differentials between groups than sorting on the basis of consumers reservation prices for the good when firms sort customers on the basis of strength of brand preference however we find that the output and welfare effects are generally less favorable than when sorting is more closely related to consumers reservation prices

export performance in transition economies trade performance export reorientation in the transition we examine export performance in the transition economies of europe and central asia we conclude that early success in exporting required the simultaneous pursuit of stabilization and liberalization neither liberalizing the foreign trade regime alone nor drastic devaluations of domestic currencies will improve trade performance unless domestic prices are decontrolled inflationary expectations lowered and administrative controls over the economy relaxed within the foreign trade regime removing export controls appears a more immediate priority than relaxing import controls export controls induce undervaluation and high levels of protection that insulate domestic producers and consumers from international markets bartlomiej kaminski zhen kun wang and l alan winters

welfare gains from capital inflows under import quotas abstract the presence of tariffs was assumed in the literature which examined the effect of additional foreign investment on the welfare of the host country in the small country setting however this paper analyzes the case of import quotas and shows that additional inflows of foreign capital improve the host country s welfare when import quotas are kept constant

spatial differentiation and price discrimination in the cement industry evidence from a structural model we estimate a structural model of the cement industry that incorporates spatial differentiation and price discrimination focusing on the us southwest over 1983 2003 we leverage the structure of the model to obtain consistent estimates of the underlying parameters using data on market outcomes that are substantially aggregated our results indicate that transportation costs around 0 46 per tonne mile rationalize the data this friction enables relatively isolated plants to obtain higher prices from nearby customers we further find that disallowing price discrimination would create 30 million in consumer surplus annually and show how the model can identify suitable divestitures in merger analysis

the boundaries of multinational enterprises and the theory of international trade this paper begins with a review of empirical evidence on multinational firms conceptual underpinnings of a theory are developed relying in particular on the notion of knowledge capital as a mobile joint input into geographically separated production facilities this idea is embedded in a simple two country general equilibrium model that supports multinational production in equilibrium under conditions consistent with the empirical evidence the final section examines internalization and shows why certain properties of knowledge capital also imply a preference for transferring technologies internally within the firm rather than through arm s length markets

import restrictions capital taxes and welfare this paper develops a two good small country general equilibrium model with trade restrictions i e a tariff an import quota or a voluntary export restraint ver inter national capital mobility and taxes on the rate of return to capital within this context it examines the price and welfare effects of capital taxes the second best policy towards capital in the presence of such trade restrictions and the welfare implications of trade liberalization in the presence of capital taxes the analysis demonstrates among other things that i the optimal policy towards capital is a zero tax when imports are quota constrained and is a tax under a tariff and a subsidy under a ver when the imported good is capital intensive and that ii an asymmetry exists between trade and capital movements liberalization under the various trade regimes

vertical and horizontal intra industry trade a cross industry analysis for the united kingdom a large theoretical literature has emerged directed at explaining the presence of intra industry trade iit one of the distinctions which comes out of these models is that between horizontal iit where goods are differentiated by attributes and vertical iit where goods are differentiated by quality in this paper horizontal and vertical iit in u k trade are disentangled using a unit value dispersion criterion and a range of industry characteristics the paper not only points up the relative importance of vertical and horizontal iit in the united kingdom it also demonstrates how a failure to separate them out can impact on the interpretation of empirical results copyright 1995 by royal economic society

tariff protection and taxation of foreign capital the welfare implications for a small country abstract this paper extends recent studies by deriving sufficient conditions for tariff immiserization in a small country in the presence of internationally mobile sector specific capital the returns of which are taxed or subsidized necessary conditions for a welfare augmenting tariff are also discussed and the analysis is extended to the welfare implications of changes in the tax or subsidy rate on the earnings of migrating capital

price discrimination and bargaining empirical evidence from medical devices many important issues in business to business markets involve price discrimination and negotiated prices situations where theoretical predictions are ambiguous this paper uses new panel data on buyer supplier transfers and a structural model to empirically analyze bargaining and price discrimination in a medical device market while many phenomena that restrict price discrimination are suggested as ways to decrease hospital costs e g mergers group purchasing organizations and transparency i find that 1 non discriminatory pricing actually works against hospitals because competition is more intense under price discrimination and 2 results depend ultimately on a previously unexplored bargaining effect

factor intensities and factor substitution in general equilibrium abstract this article examines how factor intensity rankings between industries and the economy wide asymmetry in the degree of factor substitution combine to influence the manner in which changes in relative commodity prices affect the factoral distribution of income the reciprocal influence of factor endowment changes on the composition of outputs is also discussed the analysis is undertaken in a general three factor two commodity framework the minimal sized model that allows both influences to affect factor prices and admits of the possibility of complementarity between factors factors which are good substitutes find their returns behave somewhat similarly when commodity prices change while factors which are complements experience strongly asymmetrical fortunes a crucial role is played by a comparison of the share of the middle factor in each sector

quotas and the second best abstract this note makes two observations about trade restrictions on subgroups of commodities first unlike tariffs unalterable quotas provide no second best justification for general restrictions second the optimal allocation of intra subgroup trade depends on the form of restraint imposed

export propensities and intensities of small and medium manufacturing enterprises in south africa the basic premise of this study is that enterprise linkages export marketing and sunk costs significantly affect the propensities to export and intensities of exporting of small and medium manufacturing enterprises in south africa the hypothesis tested was that small and medium manufacturing enterprises break through into foreign markets with relative ease when involved in linkages because they facilitate information flows thereby easing the international marketing burden on the shoulders of individual enterprise units a theoretical perspective adopted by this study was that small and medium sized enterprises involved in enterprise linkages that have intermediaries are in a better position to enter and exit international markets empirical testing using survey data confirms this this study therefore recommends that export promotion initiatives should take these factors into account there are many possibilities discussed in this study the important point is that there is now clarity about the main hindrances to probabilities of exporting and export intensities of small and medium manufacturing enterprises in south africa by implication export market intelligence should be prioritized

price discrimination in oligopoly evidence from regional newspapers recent theoretical work has shown that the incentive to target rival firms customers with low prices can increase price discrimination and that the strength of the incentive depends on a firm s market position using data on swedish newspaper subscriptions we find strong support for these predictions newspapers with a local competitor sell a larger part of their circulation at a discount than monopoly newspapers moreover in competitive markets the use of discounts is inversely related to the newspaper s market share we find no evidence that price discrimination based on observable and exogenous characteristics is influenced by the market structure

third degree price discrimination in oligopoly all out competition and strategic commitment price discrimination by imperfectly competitive firms may intensify competition leading to lower prices for all consumers the tradeoff of consumer groups welfare that is characteristic of monopolistic discrimination need not arise this escalation of competition may make firms worse off and as a result firms may wish to avoid the discriminatory outcome under conditions similar to those in which unambiguous price and welfare effects may arise unilateral commitments not to price discriminate including the adoption of everyday low pricing or no haggle policies may raise firm profits by softening price competition

revealed comparative advantage and competitiveness in hungarian agri food sectors we examine the competitiveness of hungarian agriculture and food processing in relation to that of the eu based on four indices of revealed comparative advantage using highly disaggregate data for the period 1992 to 1998 consistency tests suggest that the indices are less satisfactory as cardinal measures but are useful in identifying the demarcation between comparative advantage and comparative disadvantage hungary is shown to have a comparative advantage in a range of agri food products including animals and meat this complements the findings of those studies that have used price and cost based approaches in identifying competitiveness in cereals and crops results indicate that the rca indices when interpreted as a binary measure have remained surprisingly stable during the period of transition although there is evidence of a weakening in the level of comparative advantage as revealed in the balassa index

international factor mobility minimum wage rates and factor price equalization a synthesis this paper examines the behavior of a small open economy facing perfectly elastic supply curves for some of its productive factors in particular the paper derives some comparative statics properties of such economies compares them with the properties of otherwise identical economies in which all factor prices are determined endogenously and investigates the relationship between factor price rigidities factor price equalization and the pattern of specialization among the new results which are proved it is shown that as more and more factor price rigidities are imposed on an economy it comes closer to a state of factor price equalization

determinants of the export structure of countries in central and eastern europe the growth in exports from central and eastern europe to western markets suggests that entrepreneurs have responded to changed incentives by restructuring their production to capture new markets the absence of change in the structure of exports however suggests that these restructuring efforts have not been significant this article analyzes the magnitude of the change in export structure across the central and eastern european countries in 1990 95 focusing in particular on trade with the european union it finds that imports of intermediate inputs and machinery are an important determinant of the changes in export structure sourcing of inputs from abroad is a major factor underlying the expansion of exports to the european union outward processing subcontracting arrangements and foreign direct investment have a smaller impact except for poland inflows of foreign direct investment are statistically insignificant or negatively associated with measures of revealed comparative advantage this suggests that foreign investors have chosen sectors in which the central and eastern european countries were not relatively specialized under central planning

tariffs quotas and voluntary export restraints with and without internationally mobile capital this paper presents a general framework for comparing the effects of tariffs quotas and vers voluntary export restraints both with and without international capital mobility expressions for the shadow price of foreign exchange and the shadow price of capital under each type of trade restriction are derived and it is shown that although international capital mobility raises the welfare cost of tariff protection it lowers the welfare cost of quantitative restrictions in most cases the effects of exogenous shocks in the presence of quotas are intermediate between those in the presence of tariffs and those in the presence of vers tarifs douaniers contingentements et restrictions volontaires d l exportation quand le capital est ou n est pas mobile internationalement l auteur presente un cadre general d analyse qu il utilise pour comparer les effets de tarifs douaniers de contingentements et de restrictions volontaires a l exportation dans des contextes ofu le capital est ou n est pas mobile internationalement l auteur derive le prix fictif du change etranger et le prix fictif du capital sous l un et l autre types de restrictions au commerce et montre que meme si la mobilite internationale du capital augmente le cofut en terme de bien etre de la protection tarifaire elle reduit le cofut en terme de bien etre des restrictions sur les quantites echangees dans tous les cas les effets de chocs exogenes quand des contingentements existent sont toujours dans la fourchette entre ceux qu on observe quand des tarifs douaniers existent et ceux qui prevalent quand des restrictions volontaires i l exportation existent

welfare implications of growth under quotas abstract using the standard trade model it is shown that growth under quotas always improves welfare this result is contrary to johnson s 1967 result on the possibilities of immeserizing growth in the presence of tariffs

the effects of third degree price discrimination in oligopoly retail firms and restaurants commonly offer senior citizen discounts i suspect this practice is not motivated by altruism rather the behavior can be better explained as profit maximizing price discrimination these firms are setting a low price in a market which probably has high elasticity of demand but why should the demand of senior citizens be more elastic than average one possibility is that elderly people have below average income and they would not eat out if restaurant prices were high perhaps a more plausible explanation is that retired people simply have more time on their hands to spend commuting across town to take advantage of discounts the purpose of these discounts may then be to lure senior citizens away from other restaurants rather than to get them out of the house the analysis of third degree price discrimination has a long history a c pigou 1920 joan robinson 1933 and two articles on the subject have recently appeared in this review richard schmalensee 1981 hal varian 1985 the industry structure in these analyses is monopoly but an explicit model of some form of competition is obviously needed to study discriminatory discounts meant to attract customers from rival firms and even discounts meant to get people out of the house may have an oligopoly analysis which is qualitatively different from their monopoly anlysis in this paper i present a simple duopoly model of a differentiated products industry i show that a firm s price elasticity of demand in a market can be expressed as the sum of two parts the industry demand elasticity and the cross price elasticity the first measures the tendency of consumers in a market to stay home when the price goes up the second the tendency to switch suppliers in the monopoly case in which the crossprice elasticity is zero and the collusive case in which the cross price elasticity is irrelevant discrimination between markets is due to differences in industry demand elasticity in the noncooperative oligopoly case equilibrium price differentials can be accounted for both by differences in cross price elasticity as well as differences in industry demand elasticity total industry output when the firms can discriminate between two markets is compared to what it would be if discrimination were impossible which regime has larger output depends on the sum of the adjustedconcavity condition and the elasticity ratio condition the first predominates when the rival products are poor substitutes and the firms have approximate monopoly power while the second predominates at the other extreme where the products are close substitutes and the firms have almost no market power the adjusted concavity condition compares the relative curvature of demands in the two markets and was originally discovered by robinson 1933 in her analysis of monopoly price discrimination the elasticity ratio condition compares the relative difference in industry demand elasticity between the two markets with the relative difference in cross price elasticity according to the elasticity ratio condition a discriminatory discount due to high industry elasticity of demand would be more likely to increase total output than one due to high cross price elasticity the effect of discrimination on profit is also discussed the distinction made here department of economics university of wisconsin madison madison wi 53706 this paper is a revision of part of my doctoral dissertation i am grateful to steve matthews ken judd and john panzar for guidance in this research i also thank seminar participants at wisconsin the justice department and the 1986 econometric society meetings in new orleans and the discussant martin perry the excellent comments of the referees improved the exposition of the paper

evidence of directional price discrimination in the u s airline industry abstract this paper explores possible determinants that may affect an airline s decision to charge passengers different roundtrip fares depending on trip origin a case of directional price discrimination such fare differences cannot be the result of differences in cost as the cost of flying a roundtrip passenger does not significantly differ depending on direction it is argued that directional fare differences result from airlines recognizing that passenger price elasticities differ between route endpoints a price discriminating airline will then charge a higher roundtrip fare at the endpoint where the passenger price elasticity of demand is comparatively lower evidence is found suggesting that airlines do use differences in income to price discriminate when setting roundtrip fares fares are found to be 0 18 0 43 higher on average for each 1000 difference in average per capita income between origin and destination metro areas this finding is sensible assuming that higher incomes reduce the price elasticity of demand for air travel with richer passengers being less sensitive to the cost of travel

tariffs quotas and domestic content protection some political economy considerations in this paper we have focused our attention on the relation between the configuration of protection seeking and of rent seeking interests and the choice of the protection instruments in doing so we have abstracted from the problem of nonequivalence of tariffs and quotas recent writings on product differentiation rodriguez 1979 donnenfeld 1984 have thrown new light on this old issue it may well be that the discussion is of key importance to the understanding of industry s predilection for quantitative restraints we also failed to deal with the question on nonequivalence of restrictive measures under conditions of uncertainty finally we touched only peripherally on the interaction among state it is perhaps more realistic to regard trade barrier formation as a game among nations as in baldwin and clarke 1985 every player seeks at once to protect its import substituting industries and to promote its exports by putting up barriers and by demanding that others lower theirs this approach is more suited however to explain the severity of restraints than it is to explain the nature of restraints which is the problem at hand trade restrictions have a protective and a revenue effect in less developed countries with ineffectual internal revenue collecting systems revenue seeking governments may ally themselves with protection seeking emergent industries and institute high tariffs tariffs and quotas may coexist if the trade restriction seeking alliance includes traders voluntary export restraints the newest of the protective devices may be popular because they circumvent international treaties and short circuit cumbersome procedures associated with changes in tariffs or quotas but they also have the virtue of inviting foreign exporters to act like price setters the harm to the foreign exporters is thereby mitigated in fact exporters may be gainers hence the danger of retaliatory action on the part of foreign governments is lessened domestic content legislation is a unique device in that the same domestic factor benefits from protection and also collects the protection created revenue we show the formal identity between the south african situation in which the maximum black white worker ratio is a binding constraint and regulations requiring that a given percentage of the value of the product be domestically produced we also derive formally the maximum permissible foreign content ratio which is optimal from the point of view of the protected interests in our analysis we have said virtually nothing about the victims of protectionism a discussion of the impact of the various measures on those who bear the cost of protection would doubtless deepen our understanding of the problem we should thus consider the magnitude of the deadweight loss and of the income transfer and the concentration or dispersion of the losers last but not least we should consider the question of awareness thus the cost impact of a tariff is easier to perceive than that of a quota with the cost of a ver or of domestic import content rule the most difficult to calculate of all it may be that the principle of the hiding hand is as important to the new political economy as the benthamite principles were to the old

import quotas and vers a comparative analysis in a three country framework abstract because a ver is inherently discriminatory the traditional two country analysis comparing it to a quota is inadequate this paper adopts a general equilibrium three country approach to compare tariffs quotas and vers a quota equivalent ver is defined alternatively in terms of quantity or price the welfare of the importing country is higher under a quota and that of the non restricted exporter is higher under a ver the welfare comparison for the ver restricted country is ambiguous a result which is at variance with conventional wisdom

an empirical investigation of the welfare effects of banning wholesale price discrimination rand 054 rand2007 cls 1994 07 13 v1 2u standard latex document class rand rand 054 dispatch 12 7 2008 ce n a journal msp no no of pages 26 pe sharon rand journal of economics vol 40 no 1 spring 2009 pp 20 45 an empirical investigation of the welfare effects of banning wholesale price discrimination sofia berto villas boas economic theory does not provide sharp predictions on the welfare effects of banning wholesale price discrimination if downstream cost differences exist then discrimination shifts production inefficiently toward high cost retailers so a ban increases welfare if differences in price elasticity of demand across retailers exist discrimination may increase welfare if quantity sold increases so a ban reduces welfare using retail prices and quantities of coffee brands sold by german retailers i estimate a model of demand and supply and separate cost and demand differences simulating a ban on wholesale price discrimination has positive welfare effects in this market and less if downstream cost differences shrink or with less competition introduction wholesale price discrimination means that an upstream firm sets different prices for the same product for various downstream retailers wholesale price discrimination is commonly practiced in many markets examples include markets such as petroleum distribution steel heavy trucking tobacco and pharmaceuticals in several countries milk and other dairy products are sold using government administered or sanctioned discriminatory pricing schemes wholesale price discrimination practices are also used for services such as loans insurance and advertising 1 competition authorities have been concerned with wholesale price discrimination the european union treaty s article 82 c prohibits practices where a dominant firm would place trading partners at a competitive disadvantage the u s robinson patman act forbids discriminat ing in price between different purchasers where the effect may be to lessen competition unless the university of california berkeley sberto are berkeley edu i thank the editor igal hendel and two anonymous referees for many helpful comments and max auffhammer cyndi berck peter berck gal hochman silke januszewski forbes george judge kai uwe k uhn diana lazo mark muendler aviv nevo ariel pakes jeff perloff andrew sweeting miguel villas boas and participants at uc san diego university of michigan the inra idei conference in toulouse and the university of british columbia summer conference in industrial organization for their suggestions i thank daniel klapper for letting me have access to the data support from the giannini foundation and from an aes grant are gratefully appreciated see for gasoline markets texaco v hasbrouck 496 us 543 no 87 2048 1990 and the new york state motor fuel marketing practices act for steel chan hall and rust 2003 for heavy trucking volvo trucks north america inc v reeder simco gmc inc docket no 04 905 for tobacco brooke group ltd v brown and williamson tobacco corp 509 us 209 no 92 466 1993 for wholesale pharmaceuticals see http www datcp state wi us trade business unfair comp drug price jsp for dairy markets see for example gardner 1984 and for services see givens 1983 c 2009 rand copyright

general equilibrium effects of import constraints under variable labour supply public goods and income taxation we consider a general equilibrium trade model of a small open economy with a representative consumer where labour supply is variable where imports are restricted by a small tariff a quota or a voluntary export restraint ver and where alongside the production of two traded goods one imported and one exported a pure public good is produced and funded through an income tax within this framework we demonstrate among other things that under certain conditions while a small tariff or quota reduces employment and welfare a ver may increase them thus in the context of a small open economy contrary to standard results in certain cases vers may become the welfare and employment dominant instrument over the alternative import restrictions

the dominant firm advantage in multiproduct industries evidence from the u s airlines in many industries the largest firms are most successful in entering and competing in individual markets or submarkets while this success is often attributed to cost or quality differences it may also reflect reputation advantages or marketing strategies that benefit firms selling a wider variety of products in the industry i present an approach to estimating the advantages of a dominant firm in the airline industry that allows one to effectively control for cost and quality heterogeneity results using data from 1986 indicate that an airline with a dominant presence at an airport will have a significant advantage in attracting customers whose trips originate at that airport regardless of the specific route on which the customer is traveling

on the strategic choice of spatial price policy the strategic incentives with respect to the choice of price policy in spatial competition are analyzed in a duopoly model price discrimination emerges as the unique equilibriu m outcome in games with either simultaneous choice of policy and pric e or sequential choice where firms may commit first to uniform mill p ricing before the actual market stage nevertheless profits may be h igher with uniform pricing the authors models are applied to analyz e some common business practices that arise in geographical pricing like the basing point system and in the pricing of varieties or opti ons from a base product in a product differentiation context copyright 1988 by american economic association

research note consumer heterogeneity and competitive price matching guarantees price matching guarantees are widely used in consumer and industrial markets previous studies argue that they are a marketing tactic that facilitates implicit price collusion this is because once a store adopts this marketing tactic its rivals can no longer steal its customers by undercutting its price and hence they have little incentive to initiate price cuts while a store with price matching guarantees has no fear of losing customers to rivals price cuts it has every incentive to raise its own price to charge a higher price to its loyal consumers a growing body of legal literature uses this argument today to justify calls for antitrust actions against stores employing this marketing tactic however this theoretical conclusion baffles practitioners and industry experts in practice sellers typically embrace this marketing tactic in response to heavier competition and a growing bargain consciousness among shoppers the introduction of price matching guarantees by a store is frequently interpreted by industry observers as the initiation of a price war rather than a signal of price collusion this assertion is supported in many instances by the fact that stores that introduce price matching guarantees also roll back their prices and typically suffer subsequent loss of profits most ironically the favorite examples used by researchers to illustrate how price matching guarantees can enforce price collusion crazy eddie and nobody beats the wiz have subsequently either gone bankrupt or filed for federal bankruptcy protection in this study we show that price matching guarantees can indeed facilitate competition the expected prices and profits can be strictly lower when all stores adopt price matching guarantees than when they are not allowed to this is because the adoption of price matching guarantees generates not only a competition dampening effect which has been recognized in the literature but also a competition enhancing effect this latter effect comes from the fact that price matching guarantees encourage price search by those consumers who prefer to shop at a particular store but are mindful of saving opportunities these consumers will have incentives to obtain the rival store s price when their favorite store offers price matching guarantees to avail themselves of the lowest possible price at their favorite store as a result price matching guarantees reduce the number of purchases at the store from those consumers who would have paid the full price and thus prompt a store to price more aggressively to bid for more incremental sales this competition enhancing effect can more than offset the competition dampening effect in markets where consumers differ in their price search costs and store loyalty thus our study casts doubt on the advisability of blanket prohibition on price matching guarantees our argument relies only on consumer segmentation and on the phenomenon of periodic sales both of which are common in retail markets we arrive at our conclusion by incorporating bargain shoppers and opportunistic loyals into the standard sales promotion models in contrast the past literature on price matching guarantees ignores the ubiquitous phenomenon of sales in retail markets and overlooks those consumers who prefer to shop at a particular store but are alert to saving opportunities as a result it is troubled by two awkward conclusions on the one hand price matching guarantees simply remove rivals incentives to undercut in price and hence also their incentives to run sales this implies that the adoption of price matching guarantees in a market will eliminate the phenomenon of sales which is obviously counterfactual on the other hand in equilibrium no consumer actually invokes price matching guarantees as each player has incentives to close any price gap in the market this is obviously false based on our casual observations and our conversations with store managers theoretical research on the subject thus far has been overwhelmingly one sided and empirical or experimental studies are conspicuously lacking we hope that our conclusion will spark further research in both directions a healthy debate will broaden our perspective on an issue of great importance in formulating public policies and in managerial decision making