Executive Summary
A price-matching guarantee is a retailer’s guarantee that it will match any lower advertised price in the market if a consumer can provide evidence of it. Although many retailers offer such guarantees, not all of them do. For example, among department stores, Sears offers such a guarantee, but Bloomingdale’s does not; among office-supply stores, Staples offers a price-matching guarantee, but Berger Brothers Office Supply (in Wilmington, Del.) does not; and among sporting-goods retailers, Oshman’s offers a guarantee, but Academy Sports and Outdoors does not.
This article asks the question, What type of retailer is more likely to offer a price-matching guarantee, a retailer with low levels of service or a retailer with high levels of service? The theoretical and empirical answer is that low-service retailers are more likely to offer price-matching guarantees than high-service retailers. Price-matching guarantees are not an attractive marketing tool for high-service retailers, because they prevent such firms from realizing the fruits of their service differentiation. A high-service retailer that offers a price guarantee is effectively delegating its pricing decision to its lower-service, lower-priced competitor. By eschewing the guarantee, a high-service retailer can price as it likes, and this freedom would entail charging higher prices, commensurate with service-sensitive consumers’ greater willingness-to-pay.
According to the authors’ theory, offering a price-matching guarantee and not offering a price-matching guarantee are both signals of a retailer’s service–price profile, a way of branding the retailer to uninformed consumers. The signals are made credible and costless by the presence of informed consumers. When the service differentiation is large enough, the authors show that only low-service retailers will offer price-matching guarantees.
Data from a sample of Canadian retail chains support this prediction. The authors find that larger retail chains are more likely to offer price-matching guarantees than smaller chains, and competition has an interactive effect with service. As the intensity of competition that a chain faces increases, lower-service retailers are even more likely to use a guarantee, and higher-service retailers are even less likely to do so, suggesting that price-matching guarantees are competitive tools, not collusive tools as the academic literature has often implied.
Biography
Sridhar Moorthy is Manny Rotman Professor of Marketing in Rotman School of Management at the University of Toronto. He received his doctoral degree from Stanford University and has taught at the University of Rochester, Yale University, INSEAD, University of California, Los Angeles, and the Wharton School. Moorthy’s research uses the tools of economics to study marketing problems. Other work in this journal and other journals (e.g., Journal of Consumer Research, Rand Journal of Economics) has examined the relationship between advertising and product quality, product differentiation, consumer information search, and money-back guarantees. Moorthy is an area editor of Marketing Science and an associate editor of Quantitative Marketing and Economics. He is also a member of the editorial board of Journal of Marketing Research. He is the coauthor (with Philip Kotler and Gary Lilien) of Marketing Models (Prentice Hall 1992).
Xubing Zhang is an assistant professor in the Management and Marketing Department at Hong Kong Polytechnic University. He received his doctoral degree in Marketing from the University of Toronto. His research interests include analytical and empirical research in retailing practices, distribution channels, Internet marketing, advertising, pricing, and competitive strategies. His current research examines multichannel retailing, pricing strategies of online book retailers, cobranding, and consumers’ search behavior online.
J Marketing Research, Volume 43, Number 2, May 2006
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