3 ms·

Don't we want companies to engage in price competition though? Especially in a market with network effects which is dominated by a few large players.

qeternity 9y ago
What OP is saying is that this isn't competitive, rather it's a way to signal to other participants not to cut their prices. They can't do this outright because that would be collusion and violate anti-trust laws. OP referenced MAD which is the cold war tactic of mutually assured destruction. Basically, if you nuke me I nuke you back and we all die...so nobody nukes anyone. This is the same but with price competition. If you cut your prices to try to gain market share, I'll cut mine too. You'll gain no market share but you will lose revenue.
mcphage 9y ago
> Don't we want companies to engage in price competition though? As consumers, absolutely we do. But the person asking the question asked why companies don't do that, and the answer is that it's a bad business decision for them.
JumpCrisscross 9y ago
> Don't we want companies to engage in price competition...? The literature is mixed on the effects of price-matching guarantees [1][2]. The most compelling resolution I've read says "price-matching guarantees can facilitate monopoly pricing only if firms automatically match prices. If consumers must instead request refunds (thereby incurring hassle costs)...any increase in equilibrium prices due to firms’ price-matching policies will be small; often, no price increase can be supported" [3]. In any case, enforcing an automatic price-matching ban would be difficult. Would you prohibit firms from lowering their prices to match competitors'? If not, it would just take a few turns of the ratchet to send the message to would-be competitors (and consumers). Whether the consumer surplus from those ratchet turns are worth the enforcement cost is an open question. [1] https://www.bauer.uh.edu/jhess/documents/10.pdf https://www.bauer.uh.edu/jhess/documents/10.pdf [2] http://people.tamu.edu/~sjain/papers/published%20pmr%20paper.pdf http://people.tamu.edu/~sjain/papers/published%20pmr%20paper... [3] http://www.simon.rochester.edu/fac/SHAFFER/Published/Hassel%20Costs.pdf http://www.simon.rochester.edu/fac/SHAFFER/Published/Hassel%...
- frgtpsswrdlame 9y ago
  >In any case, enforcing an automatic price-matching ban would be difficult. Would you prohibit firms from lowering their prices to match competitors'? If not, it would just take a few turns of the ratchet to send the message to would-be competitors (and consumers). Whether the consumer surplus from those ratchet turns are worth the enforcement cost is an open question. Couldn't you just make a law saying "price-match guarantees are illegal"? Firms who explicitly move prices to match each other is fine with me, but the match guarantee is problematic. It seems that your conclusion is that companies use matching guarantees to implicitly collude but that even if we got rid of this they would still collude. But we should still stamp out collusion wherever we see it even if that puts us in a whack-a-mole situation.
daveguy 9y ago
We want companies to engage in price competition. Companies don't want to engage in price competition. They want to be able to sell items for as much as possible. Price match guarantee is a legal way for companies to collude on prices.

qeternity 9y ago

What OP is saying is that this isn't competitive, rather it's a way to signal to other participants not to cut their prices. They can't do this outright because that would be collusion and violate anti-trust laws. OP referenced MAD which is the cold war tactic of mutually assured destruction. Basically, if you nuke me I nuke you back and we all die...so nobody nukes anyone. This is the same but with price competition. If you cut your prices to try to gain market share, I'll cut mine too. You'll gain no market share but you will lose revenue.

mcphage 9y ago

> Don't we want companies to engage in price competition though? As consumers, absolutely we do. But the person asking the question asked why companies don't do that, and the answer is that it's a bad business decision for them.

JumpCrisscross 9y ago

> Don't we want companies to engage in price competition...? The literature is mixed on the effects of price-matching guarantees [1][2]. The most compelling resolution I've read says "price-matching guarantees can facilitate monopoly pricing only if firms automatically match prices. If consumers must instead request refunds (thereby incurring hassle costs)...any increase in equilibrium prices due to firms’ price-matching policies will be small; often, no price increase can be supported" [3]. In any case, enforcing an automatic price-matching ban would be difficult. Would you prohibit firms from lowering their prices to match competitors'? If not, it would just take a few turns of the ratchet to send the message to would-be competitors (and consumers). Whether the consumer surplus from those ratchet turns are worth the enforcement cost is an open question. [1] https://www.bauer.uh.edu/jhess/documents/10.pdf https://www.bauer.uh.edu/jhess/documents/10.pdf [2] http://people.tamu.edu/~sjain/papers/published%20pmr%20paper.pdf http://people.tamu.edu/~sjain/papers/published%20pmr%20paper... [3] http://www.simon.rochester.edu/fac/SHAFFER/Published/Hassel%20Costs.pdf http://www.simon.rochester.edu/fac/SHAFFER/Published/Hassel%...

frgtpsswrdlame 9y ago
>In any case, enforcing an automatic price-matching ban would be difficult. Would you prohibit firms from lowering their prices to match competitors'? If not, it would just take a few turns of the ratchet to send the message to would-be competitors (and consumers). Whether the consumer surplus from those ratchet turns are worth the enforcement cost is an open question. Couldn't you just make a law saying "price-match guarantees are illegal"? Firms who explicitly move prices to match each other is fine with me, but the match guarantee is problematic. It seems that your conclusion is that companies use matching guarantees to implicitly collude but that even if we got rid of this they would still collude. But we should still stamp out collusion wherever we see it even if that puts us in a whack-a-mole situation.

daveguy 9y ago

We want companies to engage in price competition. Companies don't want to engage in price competition. They want to be able to sell items for as much as possible. Price match guarantee is a legal way for companies to collude on prices.