Price-Matching Guarantees: An Equilibrium Analysis in Dual-Channel Supply Chain

Abstract

Traditionally, competing retailers offer price-matching guarantees (PMGs) whereby they promise their consumers that any lower price offered elsewhere within a specific period will be matched. Recently, a growing number of suppliers have opened their direct sales channel and started to match downstream retailers' prices. In this paper, we investigate the efficacy of PMGs on channel coordination and competition in the dual-channel setting. We find that the interaction of the relative channel power and channel substitutability moderates the effectiveness of PMGs by supply chain entities. More specifically, when the relative channel power of the retail channel over the direct channel is small, unilateral PMGs by the supplier decreases both supply chain entities' profits; when the relative channel power of the retail channel over the direct channel is medium and channel substitutability is not high, unilateral PMGs by the supplier benefits both supply chain entities. The intuition behind these results hinges on the trade-off between price competition and revenue allocation. In addition, we investigate the Nash equilibrium outcome when both the supplier and the retailer have the option to offer PMGs. We show that, the retailer weakly prefers not to offer PMGs, the supplier weakly prefers to (not to) offer PMGs when the relative channel power of the retail channel over the direct channel is high (low). Our findings not only complement the PMGs literature, but also provide a new channel coordinating mechanism concerning the channel members' pricing strategies.