Price-Match Guarantees and Game Theory
This Economist article brings a very unique and interesting point of view of how price-matching tactics used by supermarkets, which on the surface appear to be just a way of satisfying customers, can actually bring much benefit to the supermarkets by keeping profit margins high.
The traditional price wars among supermarkets can be viewed through the lens of game theory. It can be argued that some supermarkets are in a Prisoner’s Dilemma with each other, where each supermarket has the incentive to cut prices independent of what the other supermarkets do. When one supermarket has high prices, you want to lower your prices to undercut them and potentially take your competition’s customers. If your competitor is lowering their price, you want to lower your prices as well to avoid being undercut. This leads to smaller and smaller profit margins that can leave both supermarkets worse off.
As a response to this, some supermarkets are now offering a price-match guarantee which can potentially prevent these notorious price wars. Price-matching can make each supermarket’s customer base more loyal by decreasing the incentive to switch supermarkets because of price differences. With more loyal customers in the retail industry, customers are less likely to switch stores, and thus stores have a lower incentive to invest in campaigns target towards taking customers away from competitors. Also as a result of price-matching, there is much less benefit in lowering prices to try to undercut competitors because they know their competitors will just match their price. As a result, price-matching may leave both supermarkets better off. Not only do consumers benefit from lower prices, but supermarkets can also keep their profit margins higher by avoiding price wars and maintaining a loyal customer base.
http://www.economist.com/news/finance-and-economics/21643239-price-match-guarantees-prevent-rather-provoke-price-wars-guaranteed-profits