An experimental and theoretical analysis of price-matching refund policies

Price-matching refund policies, or offers by firms to match competitor's prices, are common in both consumer and industrial marketing. Much of the previous theoretical work in economics suggests that price-matching refunds are associated with higher prices. In contrast, the trade press postulates that price-matching policies are associated with lower prices. Given these inconsistent views regarding price-matching policies, the authors experimentally examine how consumers view and interpret such policies and then develop a model that incorporates these consumer interpretations as well as asymmetries across stores. In the model, the asymmetry across stores is the key to deriving the conditions under which a signaling equilibrium exists in the presence of price-matching policies. The critical point is that the competition-reducing and price discrimination effects, which seem to form the basis of most of the previous theoretical literature, can be counteracted by the presence of differentiated firms and uninformed consumers. The model suggests that under some conditions, price-matching policies can lead to more intense price competition. Furthermore, all firms will not find it profitable to offer refunds, and consistent with consumer expectations, the firms with lower prices will offer refunds.