“Price-Matching” – Are You a Free Spy for the Competitors?
The competition for customers is becoming more intense and prevalent - if nothing else would persuade people to shop until they drop then at least the “price-matching” clause should prevail against the competitors. Thus, buyer, be aware of unpaid labor you are providing to corporations on this tough labor market. The ecstatic consumers will be actively haggling with Customer Service without realizing how they are actually working as free market-spies for the companies, or even worse - are helping to maintain the cartel discipline, that otherwise would cost thousands of research dollars.
In the contemporary world many companies have highly diversified product portfolios to preserve the risk averseness; consequently, it complicates the competitiveness capability on the market, especially the assurance of profit-maximizing prices. Nobody is interested of pricing at marginal cost; the objective is to earn as much profit as possible for the effort of manufacturing and vending the merchandise to the consumers. Subsequently the question raises how to monitor the prices on the market to guarantee that your company is not left in the dry or how to convince your competitors to price favorably to your business, way above your variable and fixed costs?
When there are several superstores in the same vicinity with extensively heterogeneous product mix within the store, it can become tremendously expensive and strenuous to keep track of all of their prices. Assuming that most of the ordinary customers are seeking the bargain, the business that is capable of pricing lowest, while still making operating profit, will clearly have the competitive edge, at least in one element of the market mix. Therefore, to survey the surrounding competitors, managements offer price-matching promise to the customers, who would then implicitly monitor the market and report the price differences of all of their opponents in attempt to get a fair deal. One would not think about this as anti-competitive strategy but there is an externality to the actions of consumers; albeit, this anti-competitive strategy is legal because the marketing clause is offered to the customers and not to the competitors. Unfortunately, the buyers are the ones that will lose in this market equilibrium.
For example, Target advertises about cutting the prices and Wal-Mart will reply with the price-matching clause at which Target will correspond analogously. Preceding actions were not pro-competitive but contrary and actually reinforce the trigger strategies that maintain collusive behavior between these two superstores, even if it was unintentional. These clauses will guarantee that both of these stores will not attempt to undercut each other’s prices, because the option where one store prices high and the other low is beneficial to neither, Wal-Mart nor Target. The latter is unattainable equilibrium in the payoff matrix with the sequential strategies, where firms have frequent interactions, because the firm with higher prices will lose significantly in revenues and thus in profits. Both of them will not price low either because then they will have to price near marginal cost to assure that the opponent can’t price lower, which is not the best profit-maximizing strategy; thus, Wal-Mart and Target will both price high, like implicit cartel, knowing that if one lowers the prices then the other will too and thus in the sequence of strategies they will decrease their prices near marginal cost and will only hurt their revenues. The price-matching strategy here works like deterrent between the businesses that sell homogeneous products and neither store will have incentive to deviate from the high price. For that reason, shoppers will end up with higher prices than they would have otherwise, without the price-matching clause. This could be partly a reason why Target announced the cutting of its prices so early in the season, to give adequate time for the competitors to respond to its strategy and hence it would not have to cut the prices during the holiday shopping as much as it would have had to otherwise to lure the consumers to their stores; plus, one has to agree that the advertisement of price-cutting alone will entice anyone at least to window-shop and ultimately purchase something before they leave the store.
While talking about the price-matching and-cutting during the holiday season, it is very important to keep in mind the time-window that is extremely specific for that purpose. The businesses have to guarantee that their price strategies will produce profit and the quantity sold will compensate the decrease in prices. From the point of stores the demand is highly elastic during the Christmas season because small percentage change in price can make a huge change in quantity demanded as consumers will just pick another store for gifts. As the dawn of Christmas day approaches and most of the people have concluded their shopping, the demand actually becomes an inelastic procrastinator demand market, where the stores can raise the prices without decreasing their sales that much because those last minute shoppers don’t have time to look for bargains and most likely don’t care about them either. At certain point, for some stores, the market could become almost perfectly inelastic and the businesses could post whatever price they want, ceteris paribus, without negatively affecting quantity demanded. For example, one could imagine an increasing concave function within particular time interval where elasticity is a slope of the function and at minimum, where slope is infinite, the market is highly elastic, in the beginning of Christmas shopping season, and at its maximum point, on Christmas Day, the elasticity equals zero because quantity demanded will be unresponsive to the change in price – the procrastinators will need their gifts regardless of the prices and the people who are done with their gift wrapping are already waiting the After Christmas Sale. Unfortunately to the businesses, hiking prices in almost empty stores will not make much difference at this point. Therefore, timing is incredibly relevant in conducting price-strategies and here the price-matching will help to abate the problem of the asymmetry of information between the businesses and allow the stores to utilize this particular time frame for holiday shopping more efficiently and profitably.
In addition, the price-matching policy is actually a common element in Wal-Mart sales strategy, although its policy is quite ambiguous and often up to every store manager’s discretion. This prevailing strategy maintains its competitive edge on the local market and warns its opponents against cutting prices below its own; hence, one of the reasons why small stores with poor diversity in products are not capable of competing against Wal-Mart and have to exit the market after its entrance. When Wal-Mart offers a price-matching policy to the customers, its size and variety of articles alone guarantees the win on the provincial market because it can spread the loss of revenue from some items over the wide product mix, by increasing the prices of other items. While it price-matches the goods of the prey it can increase the prices on the other items, but since it has such a huge variety of goods it only has to rise the prices of other products slightly and thus from the customer’s point of view “penny here or there” will not make much difference in convenience of getting all your shopping done at one place. If a small store would try to do the same, it would have to hike the prices of other products considerably and thus will lose too many customers to avoid bankruptcy. Hence, it is very difficult for small mom-and-pop stores to offer price-matching policy and compete with huge stores, like Wal-Mart.
Therefore, next time when you feel temptation of bringing your receipt to the Customer Service in the name of price-matching, think twice before you act to make sure that you are not the free spy for the competitor or the promoter of collusive behavior. As customers, we all love the competitive markets because their ability to offer us lower prices; thus, we have to do our own part in promoting the long term benefits over the instant gratification of a cheaper product.
In the contemporary world many companies have highly diversified product portfolios to preserve the risk averseness; consequently, it complicates the competitiveness capability on the market, especially the assurance of profit-maximizing prices. Nobody is interested of pricing at marginal cost; the objective is to earn as much profit as possible for the effort of manufacturing and vending the merchandise to the consumers. Subsequently the question raises how to monitor the prices on the market to guarantee that your company is not left in the dry or how to convince your competitors to price favorably to your business, way above your variable and fixed costs?
When there are several superstores in the same vicinity with extensively heterogeneous product mix within the store, it can become tremendously expensive and strenuous to keep track of all of their prices. Assuming that most of the ordinary customers are seeking the bargain, the business that is capable of pricing lowest, while still making operating profit, will clearly have the competitive edge, at least in one element of the market mix. Therefore, to survey the surrounding competitors, managements offer price-matching promise to the customers, who would then implicitly monitor the market and report the price differences of all of their opponents in attempt to get a fair deal. One would not think about this as anti-competitive strategy but there is an externality to the actions of consumers; albeit, this anti-competitive strategy is legal because the marketing clause is offered to the customers and not to the competitors. Unfortunately, the buyers are the ones that will lose in this market equilibrium.
For example, Target advertises about cutting the prices and Wal-Mart will reply with the price-matching clause at which Target will correspond analogously. Preceding actions were not pro-competitive but contrary and actually reinforce the trigger strategies that maintain collusive behavior between these two superstores, even if it was unintentional. These clauses will guarantee that both of these stores will not attempt to undercut each other’s prices, because the option where one store prices high and the other low is beneficial to neither, Wal-Mart nor Target. The latter is unattainable equilibrium in the payoff matrix with the sequential strategies, where firms have frequent interactions, because the firm with higher prices will lose significantly in revenues and thus in profits. Both of them will not price low either because then they will have to price near marginal cost to assure that the opponent can’t price lower, which is not the best profit-maximizing strategy; thus, Wal-Mart and Target will both price high, like implicit cartel, knowing that if one lowers the prices then the other will too and thus in the sequence of strategies they will decrease their prices near marginal cost and will only hurt their revenues. The price-matching strategy here works like deterrent between the businesses that sell homogeneous products and neither store will have incentive to deviate from the high price. For that reason, shoppers will end up with higher prices than they would have otherwise, without the price-matching clause. This could be partly a reason why Target announced the cutting of its prices so early in the season, to give adequate time for the competitors to respond to its strategy and hence it would not have to cut the prices during the holiday shopping as much as it would have had to otherwise to lure the consumers to their stores; plus, one has to agree that the advertisement of price-cutting alone will entice anyone at least to window-shop and ultimately purchase something before they leave the store.
While talking about the price-matching and-cutting during the holiday season, it is very important to keep in mind the time-window that is extremely specific for that purpose. The businesses have to guarantee that their price strategies will produce profit and the quantity sold will compensate the decrease in prices. From the point of stores the demand is highly elastic during the Christmas season because small percentage change in price can make a huge change in quantity demanded as consumers will just pick another store for gifts. As the dawn of Christmas day approaches and most of the people have concluded their shopping, the demand actually becomes an inelastic procrastinator demand market, where the stores can raise the prices without decreasing their sales that much because those last minute shoppers don’t have time to look for bargains and most likely don’t care about them either. At certain point, for some stores, the market could become almost perfectly inelastic and the businesses could post whatever price they want, ceteris paribus, without negatively affecting quantity demanded. For example, one could imagine an increasing concave function within particular time interval where elasticity is a slope of the function and at minimum, where slope is infinite, the market is highly elastic, in the beginning of Christmas shopping season, and at its maximum point, on Christmas Day, the elasticity equals zero because quantity demanded will be unresponsive to the change in price – the procrastinators will need their gifts regardless of the prices and the people who are done with their gift wrapping are already waiting the After Christmas Sale. Unfortunately to the businesses, hiking prices in almost empty stores will not make much difference at this point. Therefore, timing is incredibly relevant in conducting price-strategies and here the price-matching will help to abate the problem of the asymmetry of information between the businesses and allow the stores to utilize this particular time frame for holiday shopping more efficiently and profitably.
In addition, the price-matching policy is actually a common element in Wal-Mart sales strategy, although its policy is quite ambiguous and often up to every store manager’s discretion. This prevailing strategy maintains its competitive edge on the local market and warns its opponents against cutting prices below its own; hence, one of the reasons why small stores with poor diversity in products are not capable of competing against Wal-Mart and have to exit the market after its entrance. When Wal-Mart offers a price-matching policy to the customers, its size and variety of articles alone guarantees the win on the provincial market because it can spread the loss of revenue from some items over the wide product mix, by increasing the prices of other items. While it price-matches the goods of the prey it can increase the prices on the other items, but since it has such a huge variety of goods it only has to rise the prices of other products slightly and thus from the customer’s point of view “penny here or there” will not make much difference in convenience of getting all your shopping done at one place. If a small store would try to do the same, it would have to hike the prices of other products considerably and thus will lose too many customers to avoid bankruptcy. Hence, it is very difficult for small mom-and-pop stores to offer price-matching policy and compete with huge stores, like Wal-Mart.
Therefore, next time when you feel temptation of bringing your receipt to the Customer Service in the name of price-matching, think twice before you act to make sure that you are not the free spy for the competitor or the promoter of collusive behavior. As customers, we all love the competitive markets because their ability to offer us lower prices; thus, we have to do our own part in promoting the long term benefits over the instant gratification of a cheaper product.
Häly Laasme
Labels: "collusive behavior", anticompetitive, price-matching, strategy
posted by Häly Laasme at 12:53 PM
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