Can Price Matching Defeat Showrooming?

Apr 16 2015

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  • Under review at Marketing Science.
  • Co-authored with Kangkang Wang and Ting Zhu.

Abstract

We study the impact of Best Buy’s recent price-matching policy on the price competition between Best Buy and Amazon, and examine whether the policy can defeat consumers’ showrooming behavior. We first empirically explore Best Buy’s and Amazon’s pricing patterns by using unique datasets collected from different sources. We find that both retailers react to the new policy; Best Buy and Amazon adjust prices in the same directions. However, the directions vary across product categories. For products for which a consumer can obtain a large value from physical store experiences, i.e., the “showrooming” products – we find that both Best Buy’s and Amazon’s prices
went down. In addition, Amazon cut prices more aggressively than Best Buy. For “non-showrooming” products, or the products for which consumers benefit less from store experiences, we find the opposite patterns –- prices went up for both Best Buy and Amazon after the implementation of the policy.

We then develop an analytical model to explain the observed data patterns. Two retailers competing on a Hotelling line are assumed to focus on both profit maximization and beating competitors. Consumers who may or may not be aware of the price matching guarantee optimally decide which store(s) to visit and where to make the purchase. We show that the effect of the price-matching policy depends on the additional value that consumers could obtain from visiting a physical store. Both retailers would raise prices when this value is small but would compete more aggressively on prices when this value is large, which is consistent with the data. We also show that for “showrooming” products, both retailers’ profits are lower as a result of the policy, but the online retailer’s payoff may actually increase because of its success in beating its competitor.

Keywords: Price matching, Showrooming, E-commerce

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