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Buy Now and Match Later: Impact of Posterior Price Matching on Profit with Strategic Consumers

Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213
Booth School of Business, University of Chicago, Chicago, Illinois 60637
Robotics Institute, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213
guomingl{at}andrew.cmu.edu
laurens.debo{at}chicagogsb.edu
katia{at}cs.cmu.edu

With a posterior price matching (PM) policy, a seller guarantees to reimburse the price difference to a consumer who buys a product before the seller marks it down. Such a policy has been widely adopted by retailers. We examine the impact of a posterior PM policy on consumers' purchasing behavior, a seller's pricing and inventory decisions, and their expected payoffs, assuming that the seller cannot credibly commit to a price path, but can implement a posterior PM policy. We find that the PM policy eliminates strategic consumers' waiting incentive and thus allows the seller to increase price in the regular selling season. When the fraction of strategic consumers is not too small and their valuation decline over time is neither too low nor too high, the PM policy can substantially improve the seller's profit, as well as the inventory investment. In such situations, the strategic consumers' waiting incentive and the loss if they wait are both high. However, to adopt this policy, the seller also bears the refund cost. The seller must either pay the refund that consumers will claim or forgo the salvage value of any leftover inventory. The PM policy can be detrimental when there are only a few strategic consumers or the strategic consumers' valuation decline is very low or very high. We find that the performance of this policy is insensitive to the proportion of consumers who claim the refund. From the consumers' perspective, the PM policy generally reduces consumer surplus; however, there are cases where consumer surplus can be increased, typically when the variance of the potential high-end market volume is high. As a result, a Pareto improvement on both the seller's and the consumers' payoffs is possible. Finally, we find that the ability to credibly commit to a fixed price path is not very valuable when the seller can implement price matching.

Key Words: strategic consumers; inventory management; pricing; discounts; rational expectations equilibrium
History: Received: December 3, 2007; accepted: October 17, 2008.