Never Knowingly Undersold – Do Low Price Guarantees Result in Lower Prices?

Abstract

Low Price Guarantees promise consumers that a retailer will match prices with eligible competitors. These policies are frequently used by retailers across the economy. On the face of it, such policies sound good for consumers, who ought to receive lower prices. However, economic theory is not conclusive on the actual effect. Theories of collusion and price discrimination predict that such guarantees could result in price rises, to the detriment of consumers. On the other hand, low price signalling theories would predict that LPGs are good for consumers. In this paper, I test the empirical effects of the removal of a low price guarantee at a leading UK retailer, and find evidence that prices rise post-removal of the policy. This implies that low price guarantees have a pro-competitive effect on retail prices and provides evidence supportive of pro-competitive arguments. Interestingly, I find that there is no effect at the retailer who removed the promise but instead that its competitors were the ones to raise prices post-removal of the guarantee.

Rhys J. Williams

PhD student in Economics

Rhys is a doctoral candidate in Economics at the University of Cambridge. His research interests are in empirical industrial organisation and related topics.