Shakun Datta (joint work with Jennifer Offenberg) 29 th June 2007

1. An Experimental Examination of Competitor-Based Price Matching Guarantees Shakun Datta (joint work with Jennifer Offenberg) 29th June 2007

2. Price Matching Debate • Pro-competitive v/s Pro-collusion • Consumers regard price matching policies as a “heuristic for low prices” (Chatterjee, Roy, 1997) • “Adopting a guaranteed-low-price policy is a good substitute for actually having low prices…” (Edlin and Emch,1999) • Experimental studies indicate that Price Matching guarantees acts a collusion facilitating device when seller costs are symmetric. • Our research question: Does asymmetry in costs affect the viability of PM guarantees as a collusion facilitating device?

3. Theoretical Model • Homogeneous goods duopoly market • Sellers simultaneously choose a posted price pi and a price policy - PM or NPM. • Set price every round but policy decision only every 4 rounds • 8 subjects per session - Randomly re-matched every 4 rounds • n (= 10)consumers are fully informed of prices and policies of both sellers. • Consumers purchase at most one unit of the good at the lowest price equal to or below their reservation value r (= $10).

4. Symmetric Cost

6. Asymmetric Cost – Small difference

7. Asymmetric Cost – Large difference

8. Dual Cost Session – 2/5 - 2/5 - 2/8

9. Dual Cost Session – 2/8 - 2/8 - 2/5

10. “Single” Small Cost Asymmetry Sessions – 2/5 NPM PM

11. “Single” Large Cost Asymmetry Sessions (2/8) NPM PM

12. Adoption of PM guarantees (c1 = 2 and ch1= 5) (c1 = 2 and ch2= 8)

13. Conclusion • When costs are symmetric, price matching guarantees act as a facilitation device for collusion. Prices are higher than the competitive level. • When costs are asymmetric, differential gains affect their collusive ability. • Less use of guarantees • Lower average price • Slower convergence to reservation price

14. Adoption of Price Guarantees by high cost seller (ch2= 8) • Non adoption - 46% • Guarantee adoption exposes them to the risk of being undercut by the low cost seller and earning negative profit. • Adoption - 54% • Repeated game strategies: Evidence of positive impact of adoption rates on the low cost seller’s incentive to cooperate • Profit for the high cost seller is positive only in case of collusion. Observed play in the finite horizon is similar to one-shot game (37%).

15. Adoption of Price Guarantees • Use of price guarantees is significantly lower in case of large cost asymmetry. • Low cost sellers adopt price matching guarantees more often than the high cost sellers, irrespective of the level of high cost. • High cost sellers are much less likely to adopt price guarantees when the cost asymmetry is large than when the cost asymmetry is small.

16. Irrespective of level of cost asymmetry, prices in the PM treatment are higher than prices in the NPM treatment. • All 8 sessions of small cost asymmetry • 9 out of 10 sessions of large cost asymmetry. • PM prices in the small cost asymmetry treatment (c1 = 2 and ch1= 5) are not different from PM prices in the large cost asymmetry treatment (c1 = 2 and ch2= 8) • The average market price in the small and large cost asymmetry is $8.55 and $8.46, while the average price in sequence 2 and 3 is $7.94 and $9.12. • Prices in sequence 2 are significantly lower than prices in sequence 3. • Holds for both “dual” and “single” cost sessions.

17. PM prices in the small cost asymmetry treatment (c1 = 2 and ch1= 5) are closer to the collusive outcome than to the competitive outcome. • The average deviation from the competitive equilibrium is 3.67 times the average deviation from the collusive equilibrium. • PM prices in the large cost asymmetry treatment (c1 = 2 and ch2= 8) lie further away from the collusive outcome than from the competitive outcome. • The average deviation of the observed price from the collusive level (1.47) is greater than from the competitive level (0.97).