Last week, Target did the once unthinkable. In addition to matching prices of local brick and mortar stores, it announced this holiday season it would also match prices of any product sold by major Internet retailers including Amazon.com, BestBuy.com, Walmart.com, and Toysrus.com.
While many stores pledge to match prices of local brick and mortar stores — consumers have to bring in a local competitor's advertisement as proof — until now matching Internet prices has been taboo. After all, physical store retailers have higher costs and their mantra has been "buy from us because we offer more benefits," including the ability to see/touch products, receive advice from knowledgeable sales people, and enjoy products instantly. But now some physical retailers are saying "the heck with it": despite their own cost disadvantages and despite offer a better shopping experience, they are aggressively courting customers with lowest price pledges. Best Buy is also matching prices — but only on appliances and electronics.
So price matching policies are good for consumers, right? Not necessarily. Consider the following three reasons:
They may reduce competition: Economists and antitrust authorities have long been concerned that price matching policies may actually reduce the incentives of stores to lower prices. If retailers know that lowering prices (to sell more of a product as well as spur additional purchases) will be matched by rivals, there's less upside to discounting — what's the point if consumers will simply go to their favorite store and request a price match?
They provide a false sense of security: Academics Maria Arbatskaya, Morten Hviid, and Greg Shaffer published a paper in the International Journal of Industrial Organization titled "On the Use of Low-Price Guarantees to Discourage Price Cutting" that empirically investigates price matching. The authors collected data on tire prices from Sunday newspapers. They found that 86% of retailers that offered to match any price — advertised or not — did not offer the lowest price. Interestingly though, 75% of retailers that offered to match only advertised prices actually offered the lowest prices.
They penalize inattentive shoppers