8. Price-Matching Strategy: Implications of Consumer Behavior and Channel Structure

Price-matching has become a ubiquitous strategy for retailers both in product and service industries, especially with the growing ease of checking prices online. With this strategy, retailers promise not to be undersold and match competitor’s lower price (if any). Price-sensitive consumers tend to be happy with this since they potentially can get the lowest price at their “favourite” retailer. A relatively under-researched topic in this context is the fact that this price convenience normally comes with a number of conditions. We analyze two of the most common ones—the product must be available at the lower priced retailer (availability condition) and the price-match extends only to a competing retailer and not to a direct-to-consumer manufacturer (channel condition)—and investigate their implications for the channel and consumers.

We show that if consumers consider the fact that they might be denied the price-matching benefit based on verification of availability at the competitor’s location while making a purchase decision, then they will benefit from a lower price by increasing the competition between the retailers; on the other hand, not considering this fact would allow the retailers to price discriminate and might harm consumers.

As regards channel structure, we prove that if the upstream partner has the power to set the wholesale price, then it does not make sense for a retail channel to price match with a manufacturer selling directly to consumers. But, in sectors where there are dominant retailers who have a say in determination of the wholesale price, price-matching can be an equilibrium strategy for the retail channel, even when manufacturers are directly selling to consumers. Furthermore, price-matching is also the equilibrium strategy for upstream manufacturers as it redirects demand from the retail to their direct channel.