Question

A price match guarantee allows firms to tacitly collude prices. What is the purpose of a price match guarantee?

1) To ensure fair competition among firms
2) To attract more customers
3) To increase profits
4) To discourage price discrimination

Answer 1

A price match guarantee is primarily intended to attract customers by ensuring they receive the lowest price, but can also lead to tacit collusion among firms, stabilizing prices and elevating profits without explicit agreements.

Step-by-step explanation:

The purpose of a price match guarantee is essentially to attract more customers by providing assurance that a consumer will not find a better price elsewhere. This can have the side effect of facilitating tacit collusion among firms, as it can lead to a stabilizing of prices across competitors. Firms are discouraged from raising prices due to fear of losing customers, and at the same time, they may avoid lowering prices because competitors will match the lower prices, leading to a uniform price level without explicit agreement. This situation can result in higher overall profits for the firms as they avoid price wars and maintain higher price points.

In oligopolistic markets, firms often engage in non-aggressive competitive strategies like price matching. This behavior allows them to share monopoly-level profits by controlling the output and prices jointly without the need for formal agreements, which are often illegal.