Review of Industrial Organization (2006) 28:359–378 © Springer 2006
Hassle Costs, Price-Matching Guarantees
and Price Competition: An Experiment
and TODD SORENSEN
Department of Economics, University of Arizona, Tucson, AZ 85721, USA
Abstract. We experimentally investigate whether the collusion-facilitating nature of price-
matching guarantees survives the introduction of hassle costs incurred by buyers to
enforce these guarantees. The presence of an arbitrarily small number of positive hassle
costs buyers may completely undermine incentives for collusion. To evaluate this possibil-
ity, we develop four one-shot price competition models that test the hassle cost argument
by varying proportions of positive and zero hassle cost buyers present in the market.
Although the theory predicts that the competitive price should emerge in equilibrium in
all four models, we experimentally ﬁnd signiﬁcant price differences.
Key words: Experiment, hassle costs, price-matching guarantees.
JEL Classiﬁcations: L11, L12, C91.
An important question in oligopoly theory is whether ﬁrms can collude to
reap monopoly proﬁts. Under current antitrust laws, overt formal coordina-
tion among ﬁrms to ﬁx prices is prohibited. However, ﬁrms may tacitly col-
lude, recognizing their mutual interdependence, and consequently achieve
the monopoly outcome.
But without explicit agreements, it is usually difﬁ-
cult for ﬁrms mutually to agree upon a price and/or ﬁrms ﬁnd it hard
to resist the idea of proﬁtable price undercuts. Nonetheless, tacit collusion
among ﬁrms is a prominent possibility in the presence of some facilitat-
ing practices widely observed in retail markets, namely publicly announced
price-matching guarantees (hereafter PMGs).
A PMG is a competitor-based low-price guarantee that typically states
that a ﬁrm will match any lower prices offered by its rivals. Salop (1986)
ﬁrst argued that PMGs could facilitate tacit collusion that will support
Author for correspondence. E-mail: email@example.com.
This concept has been known as conscious parallelism, as in Posner (1976). This idea
has its roots in Chamberlin’s (1962) discussion of oligopoly ﬁrms.