This thesis consists of three essays and one literature review. The thesis examines theoretically the effects of Low-Price Guarantees (LPGs), which are increasingly common in retail markets and goods industries. Although the essays in this thesis share a common theme, they can be read independently without impeding the readers' understanding of the issues discussed in each.
The first essay studies the effects of LPGs in the search model of Salop and Stiglitz (1977). This model provides a general framework for the comparison of Matching Competition Clauses (MCCs) and Beating Competition Clauses (BCCs): The number of firms in the market is determined by free entry and consumers have incomplete information about prices and differ in their search costs. It is shown that MCCs have stronger collusive effects than BCCs, however, these effects evaporate with the introduction of an arbitrarily small hassle cost.
The second essay extends the Milgrom and Robers model (1982) to study the entry deterrence effects of LPGs. In this model, the potential entrant has no complete information about the true unit cost of the incumbent. It is demonstrated that under certain conditions, the high-cost incumbent can imitate the behavior of the low-cost one and deter entry even in situations where this would not be possible in the absence of a price guarantee. Therefore, the corresponding policy suggestion is to prohibit this pricing behavior when it is exerted by a monopolist.
The third essay studies LPGs in a partial equilibrium model, where consumers can search for lower prices but search takes time and thus delays consumption. A price guarantee to match any lower price offered by the retailer allows a consumer to purchase and consume now while keeping the option of reaping the benefit of a lower price that he may find later in time. The analysis demonstrates how the following two factors, the variability of market prices and the percentage of bargain hunters, affect the decisions that a firm needs to make in setting its price and the duration of its price guarantee in a competitive environment.
| Identifer | oai:union.ndltd.org:uottawa.ca/oai:ruor.uottawa.ca:10393/29275 |
| Date | January 2005 |
| Creators | Zhang, Liping |
| Publisher | University of Ottawa (Canada) |
| Source Sets | Université d’Ottawa |
| Language | English |
| Detected Language | English |
| Type | Thesis |
| Format | 128 p. |
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