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MATCHING OWN PRICES, RIVALS' PRICES OR BOTH?

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  • *We thank the Editor, two anonymous referees and colleagues at the Centre for Competition Policy at the University of East Anglia for their help in improving this paper. We also gratefully acknowledge the financial support of the U.K. Economic and Social Research Council (ESRC). The usual disclaimer applies.

Abstract

Many retailers promise that they will not be undersold by rivals and extend their promise to include their own future prices. That is, many retailers combine elements of both price-matching guarantees and retroactive most-favored-customer clauses. This is puzzling because the extant literature has shown that each practice independently has the potential to facilitate supracompetitive prices, and thus one might think the two practices are substitutes. In this paper, we show that price-matching guarantees and most-favored-customer clauses complement each other when offered unilaterally by a single firm and can lead to higher prices than either one could have facilitated by itself.

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