Consumers view these guarantees as conducive to lower prices. But in fact offering a price-matching guarantee should make it less likely that competitors will slash prices, since they know that any cuts they make will immediately be matched. It’s the retail version of the doomsday machine.
Fascinating read. This part in particular caught my attention. Interesting that price matching guarantees keep prices higher by dissuading competitors from slashing prices. I had never considered that. Hell, I've always been one of those naive consumers who thought price-matching generally meant lower-prices.
I think he is wrong about price matching. You can very often find items at stores with price-match guarantees at prices higher than elsewhere. If you are willing to price-match and spend a relatively large amount of time, then you can get the item at... that same price you would have paid somewhere else. Surprisingly enough, consumers rarely take advantage of this! Price-match guarantees are a cheap way to mislead consumers that your prices are lower, not a way of negotiating with competitors. If stores wanted to signal each other, as he claims, they would automatically match prices. They don't.
Price matching serves two purposes. One is it's an effective market segmentation tool (http://en.wikipedia.org/wiki/Market_segment) as it allows people to trade effort for discounts.
The second is that it does not dissuade price differences but does dissuade price wars. As long as prices remain stable, differences are not much of a worry. It's when they start reacting to each other that retailers stand to lose a lot of money.
It doesn't really do that. Instead of going through the hassle (and it is a hassle) of price matching at store A, I can just buy the item at store B at the advertised price. The store offering price matching knows I will do that. They don't care because the guarantee sounds good to the consumer too busy to comparison shop. Unlike, say, coupons, price matching guarantees are not meant to be taken advantage of.
But I think it defeats the value of cutting prices. If your competitor honors your prices, then they are automatically matching your prices to those who are price conscientious. In fact the competitor gets the best of both worlds, they still attract the bargain hunter, but they don't lose the extra revenue that others would gladly spend.
I think the bargain hunter will just buy the product at the cheaper place to avoid the hassle of price matching. (Ever actually tried that? Employees have attitude.) I still think price-matching guarantees are disinformation aimed to give the illusion of the best price, and are very rarely taken advantage of. (The fatwallet.com crowd probably uses them, but I think stores lose money on those people. Best Buy famously had a memo calling them "devil" customers, and discussing strategies to get them to stop shopping at Best Buy.)
Ten books by Amazon and Walmart, considering their size, is more a loss-leader than price war. The publicity alone, as mentioned in the article, is worth more than any losses. After the dust has settled, both their revenue and profit intakes will likely be up.
Prices for books move around more than I would have thought. I can understand the Amazon price drop on Stephen King as mention in the article because it was an analyzed move to compete with Wallmart. (price history graph: http://www.shopobot.com/under-the-dome-a-novel-hardcover)
Fascinating read. This part in particular caught my attention. Interesting that price matching guarantees keep prices higher by dissuading competitors from slashing prices. I had never considered that. Hell, I've always been one of those naive consumers who thought price-matching generally meant lower-prices.