Price Matching Hurts Consumers by Creating Price-Fixing Cartels

Why Price Matching Hurts You

Have you ever utilized a retail store's price matching policy? (Occasionally denoted in this article as "PM")

At first, price matching seems like a good thing for shoppers. I have a Cartel Max store very close to my house, which has Product A selling for $99. But Hurt Consumers City sells Product A for $79. I just go to Cartel Max, show them the Hurt Consumers City advertisement showing the lower price, and Cartel Max will match. I get Product A for $79 without having to drive all the way to Hurt Consumers City. What a good deal for me!

Well think again. Matching policies actually perpetuate price fixing, creating a de facto cartel. Here's how.

Imagine the market without matching. Cartel Max can produce or buy Product A for $20. Cartel Max then sells at a higher price to make a profit (and to account for overhead, advertising, etc.), let's say $50. Hurt Consumers City does the same, selling Product A for $50. Since consumers pay $50 whether purchasing at Cartel Max or Hurt Consumers City, they have no reason to choose one over the other. Generally, each company will sell equal amounts of Product A, in this case 50%. Neither company can raise its price. If Cartel Max decides to raise to $60, everybody will chose to purchase from Hurt Consumers City.

Then one day, an innovative Hurt Consumers City manager comes up with a great idea. She decides to lower the price of Product A to $40. Now, when somebody wants to purchase Product A, he can pay $50 at Cartel Max or $40 at Hurt Consumers City. As you might expect, almost everybody chooses the lower price at Hurt Consumers City. And since Hurt Consumers City sells more of Product A, they make more profit despite the lower price.

But Cartel Max is smarter than that. Cartel Max cuts to $30, taking all the sales from Hurt Consumers City. This keeps happening until the price reaches market equilibrium. This is just fancy economist talk for the fair, stable price. Since both companies buy/product Product A for $20, the market equilibrium would be $20 plus expenses, and a small profit margin.