Price Guarantee Essay

Published: 2020-02-21 09:52:05
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Category: Microeconomics

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Introduction

Price guarantees have become a popular promotional tool for attracting new customers or selling new products to existing customers. Many business organizations are now adopting the price guarantee concept in their pricing policies. Most notable among them is Walmart.

General implications of price guarantees

Price guarantees can take two forms. One is price matching in which lower prices are immediately matched. The other is price beating in which lower prices are undercut by a certain percentage of the difference. Both forms of price guarantees however have immense implications as far as market expansion and market retention are concerned.

Obviously the assurance that they are getting the lowest possible prices will have a major impact on how the customers do business with the organization offering price guarantees. The effect of price guarantees is especially pronounced nowadays because of the extensive use of the internet that customers make in arriving at their purchase decisions. Because of the widespread availability of information on the internet, consumers can easily compare prices and find out which company is offering the lowest prices.

However it takes time-consuming research on the part of the consumer especially if the product in question has intense competition. All businesses these days having products and services to sell are advertising their existence online, so the consumer looking for a particular product widely available in varying prices will have to go through all those dozens of websites in order to make a worthwhile price comparison and arrive at the lowest possible price available to him or her.

However if there is a company out like Walmart which guarantees that the price it is offering is lowest available now and that even if market prices should go down in the future, the consumer will get refunds, then consumers will just fall in love with that offer because of all the time and energy saved. As a result of the assurance on the part of Walmart that the product is selling at the lowest possible price now or even in the future, consumers will rush to spend all their money on Walmart offerings.

According to the above, offering price matching or price beating seems to have an extremely positive impact on the mindset of the consumers. However not all consumers are looking for the lowest possible price and this is especially true if the product in question is a status symbol, that is, the product is an issue of image with the consumer. In that case, quality rather than price will be the prime consideration.

Consumers putting quality before price will be asking themselves why a certain company is offering such low prices. The suspicion that these consumers would be harbouring is that the quality of the product is in question. Quality defects make products difficult to sell, however an assurance of the lowest possible price will tend to make most consumers blind to minor defects that are not readily apparent. Some consumers will suspect that a particular company is adopting the policy of price guarantee in order to allay suspicions of product quality.

Benefits of price guarantees

Price guarantees can create customer goodwill as the customers are sure that they are getting the best deal possible. Price guarantees are especially applicable in the retail industry as price is the only differentiating factor in this case. The nature of the service involved in the retail industry is such that quality hardly varies from one company to another. Therefore the only way for retail companies to make themselves stand out from the crowd is to differentiate themselves through price.

This is the reason that price guarantees have become so popular in the retail industry and the customers are not complaining. They have no reason to because, as mentioned before, they no longer have to surf for hours and hours or walk miles and miles of aisles for the best deal. They will just buy whatever they need from Walmart because whatever they are buying, Walmarts prices are the best possible they can get. There is no possibility of post-purchase regrets. This is the best of all possible worlds.

As will be elaborated upon later on, price matching or price beating make it pointless for sellers to lower their prices as any benefits to be gained from the lower prices will be cancelled by the competing seller who is offering price guarantees. Thus price guarantees are a means of price signaling. It is this price signaling which assures the customers that they are getting the best possible deals.

Price guarantees have become so prevalent these days that customers expect companies to offer price guarantees. As a result, offering price guarantees has become the very act of survival for companies particularly in the retail industry. While this may be greatly beneficial for the consumers, the situation is somewhat different for the suppliers. If there is one retailer for example who buys a television set for ₤150 and offers it to the market for ₤250 with price guarantee, then another retailer who happens not to have the buying power of the other retailer and buys the same set for ₤170 will have to set the price also at ₤250.

The second retailer might want to undercut the first by setting a lower price, ₤240 for example, but the second retailer would have little to gain from this as price guarantee offered by the first retailer means that the first retailer would only either match the lower price or beat the lower price. This price cutting can go on all the way down to the purchase price of the second retailer beyond which it cannot go. This is a discounting game which the first retailer will always win because of the price guarantee it offers. In this way price guarantees ensure that there is no price cutting going on in the market and that customers always get the best possible deal.

Legal implications of price guarantee

Price collusion has become a greater threat than ever now that the internet is facilitating connectivity at an unprecedented level not only between buyers and sellers but also between sellers. So it has become easier than ever for the sellers to reach some sort of an agreement online and raise their prices simultaneously. Occurrences have been noted whereby sellers have been known to discuss their prices online and raise their prices the next day. Such price collusion is obviously anti-competitive and so illegal.

Price matching can also raise issues of price collusion in a roundabout way. What might happen is that sellers might already be selling their products at a heightened price level and one seller might offer a price guarantee in one product category while another seller might offer a price guarantee in another product category. Thus sellers might be colluding to create their own niches in specific product categories. This impairs the market forces of supply and demand as the price setting mechanism and should become the focus of regulatory agencies to identify and regulate.

Ethical implication of price guarantee

According to the invisible hand theory, consumers demand for a lower price while suppliers ask for a higher price and accordingly adjustments take place and in the process an agreement is reached between consumers and suppliers whereby both the buyers and the sellers are buying and selling respectively at the same price. This is the underlying structure of the free market economy. However the element of price guarantees can strike at this very foundation of the free market economy. What happens is that price matching, for example, discourages the other sellers from lowering their prices as the seller offering the price guarantee will only lower its own prices accordingly. Thus the phenomenon of price guarantees can perpetuate high prices at the expense of product quality and manufacturing efficiency.

Manufacturing efficiency results from the learning curve. As companies gain experience in manufacturing their products, there is a learning curve which makes their manufacturing operations more efficient. As a result, products become cheaper to produce. According to the laws of supply and demand, this would allow suppliers to lower their prices and sell more. Not so however when there is one seller in the market practicing price matching.

That seller has a pact with the buyer that the buyer will never find a lower price elsewhere and that if the buyer does find a lower price, the seller will immediately either match the new lower price or beat it. As a result of this pact, all the buyers in the market will be rushing to that seller offering price guarantees rather than to the other sellers who are offering lower prices. Inasmuch as offering price guarantees implicitly chips away at the very foundations of demand and supply as the price-setting mechanisms, the act is clearly unethical.

The use of price guarantees can be put to other unethical means as well. There have been several news items where shops offering price guarantees have been known to lure customers to their geographical sites where these same customers are then set upon by sale executives in order to make them purchase expensive items.

Conclusion

Whether or not buyers suspect price guarantees encouraging tacit price collusions, buyers prefer sellers who are offering price guarantees. This is especially so with the advent of the internet where price information is available at the click of a mouse.

Inasmuch as price guarantees turn heads in the buyer community, price guarantees hold great benefits for the seller. By using price guarantees sellers no longer have to resort to online discounters to offer lower prices and can reach the customer directly. In spite of the anti-competitive issues that arise as a result of the implementation of price guarantees, these guarantees, ethically and legally practiced, can strengthen the flow of trade and commerce.

BIBILIOGRAPHY

Pindyck, Robert S., and Daniel L Rubinfeld. Microeconomics. South western college pub. 2007.

Varian, Hal R. Microeconomic Theory. McGraw Hill/Irwin. 2005.

Mankiw, N Gregory. Principles of Microeconomics. McGraw Hill/Irwin. 2005.

Colander, David C. Microeconomics. McGraw Hill/Irwin. 2005.

Nagle, Thomas T., and John Hogan. The Strategy & Tactics of Pricing: A Guide to Growing More Profitably . South western college pub. 2007.

Baker, Ronald J. Pricing on Purpose: Creating & Capturing Value. McGraw Hill/Irwin. 2005.

McConnell, Campbell R., and Stanley L Brue. Economics. South western college pub. 2007.

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