Price Matching in Retail Matching Markets
Many retail stores, like Target or Best Buy, offer price matching. Retails operate in a matching market where one buyer, a consumer, might be matched up to multiple sellers, retailers. A consumer can find an online or physical ad of an item offered at one retailer and ask to buy it for same price at another retailer. If the other retailer offers the same item for a higher price, they’ll offer to lower the price to match the first retailer’s price. This, in theory, will allow the retailer to sell more of their stock and also boost intangibles like consumer confidence and retailer brand loyalty.
A complication is that the “matched” price might be lower than the market-clearing price. So, the retailer could have sold all of their products to different consumers if they had set the prices higher than the “matched” price. This implies that by matching prices, retailers are taking a hit to their financial bottom line. However, this reduced net income could be made up by the intangibles. Perhaps consumers will feel good knowing that they saved some money via price matching and in the long run, buy more products from that same retailer. The consumers might feel the retailer is “trustworthy”, because they had a pleasant experience. In the end, they might come back more frequently.
Still, if price matching were such a winning strategy, why is it then that many retailers attempt to make price matching as difficult an experience as possible? For example, the Target price matching policy excludes matching the price of certain other retailers and items from certain sections of the store. The policy must also be applied in a timely (14 days) manner. In essence, the onus is on the consumer to prove that the item can be price matched. This creates an unpleasant consumer experience and seems to go directly against the effects of the intangibles.
The retailers’ hesitance about price matching suggests that, though it works in theory, the actual practice of it doesn’t work out financially. The best response in a matching market, after all, doesn’t simply involve all the sellers selling all of their items; it also involves the seller selling to the buyer with the best price. So, perhaps the best strategy isn’t actually competing with your competitors to the bottom, but rather setting a price that the consumer is willing to pay. In real life, consumers buy from retailer A as opposed to retailer B not just because of the price but also because of the customer service, the range of stock, social cache afforded by shopping there, and other reasons. So while matching markets are excellent models, they fail to capture other relevant variables whose value might not be able to be captured easily and quantitatively. (Although granted, the model could be extended to have more payoffs that don’t depend on price or value of the item.)
http://www.forbes.com/sites/gregpetro/2013/02/13/price-matching-how-far-should-you-go/#72af04725756