Are Low Price Guarantees Bad for Consumers? | Microeconomics by Game Theory 101

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Firms commonly offer to low price guarantees: if another firm has a lower price, it will match that price. This would seem to be good for the consumer, as the consumer can directly leverage competitors against each other.
Incorporating price matching into a model of Bertrand competition, we will see that the benefit to the consumer is not obvious. In fact, without a low price guarantee, the consumer obtains all of the surplus. But with a low price guarantee, equilibria exist where the consumer receives none of it.

[@PunmasterSTP]

Low price guarantees? More like "Ludicrous counter-intuition indeed!" I wouldn't have thought that about these types of guarantees up front, and I'm really glad I came across this video.

[@SmileyEmoji42]

This is fine in theory but not in practice because of psychology: 1) Asking for the price to be matched has a cost in terms of research and embarassment that few people are willing to pay and the stores know this. 2) Many products are deemed to be not equivalent. There are many tricks for this. 3) There are other factors besides price for some products (e.g. I buy stuff at John Lewis for the warranty)

[@Noname-iz9uo]

Thank you so much. This is very interesting and enlightening. So low price guarantee is in fact anticompetitive and a signal for cooperation.

[@Gametheory101]

You're welcome! I would amend that to say "there are conditions where low price guarantees are anticompetitive." Models are good for telling us what is true for a given set of assumptions. The set of assumptions described here do not preclude other assumptions under which low price guarantees are good for consumers.

[@Noname-iz9uo]

William Spaniel damn, I was about to send this video to my local antitrust watchdog. The assumption here is that the consumer is always different between firms. This is not a terribly strong assumption given that firms typically only offer To match price with a comparable competitor...

[@Gametheory101]

Well, I do think that it would be good if more people were aware of the second-order consequences of low price guarantees!

[@ajbdkla3652]

If you add a third firm without a low price guarantee, would the equilibrium return to c? Or would the third firm have no profit incentive to undercut the price matching firms?

[@Gametheory101]

Let's assume that the consumer randomizes evenly among firms that she is indifferent over. Then one of the low price guarantee firms could profitably deviate to a slightly smaller amount. By doing so, it and the other low price guarantee firm each receive half of the business rather than a third. So higher prices are unsustainable without the other firm offering the guarantee.

[@haliluya4217]

Benefit a lot. Thank you! 💕But I have a question, why not directly assume a=1/2 in the low price guarantee since it's a duopoly case🤔

[@orktv4673]

Is this an phenomenon that occurs inadvertently in the free market, or rather a warning about something that is imposed from the outside?

[@slowsatsuma3214]

What a beautiful man you are, thank you sir.