A Wii Bit of an Error? Price Matching as Price Fixing

Yesterday, Sears made a wiiiiii bit of an error, selling a new Wii U for the bargain price of $60, a sharp markdown from the standard $300 price tag. People caught on and immediately bought as many as they could. That was smart. Sears eventually pulled it, though. So smarter people went one step further: they visited other retailers and bought $60 systems using price match guarantees, i.e., promises retailers make to sell like-goods at the lowest price of their competitors. Particularly crafty individuals allegedly went from Wal-Mart to Wal-Mart clearly out the storerooms.

This raised a moral question: is it right for consumers to take advantage of Sears’ mistake, manipulate the system, and trick (“trick”?) other retailers into also selling their products at a loss? Some people on Reddit felt that way:

I think I’d feel guilty doing that. But dang that’s a good deal.

Am I the only one who thinks it’s kinda [bad] to make another store pay for Sears error? You know it’s a error so why make it someone else’s problem?

Is there a difference between a legitimate offer / deal and taking advantage of a mistake? I’ll see you all in hell, which is where I’ll be down-voted into, where I can play Mario Kart with you thieving [lovely individuals].

I can certainly see their point. However, I don’t think that anyone should lose sleep for taking advantage of Target and friends for price matching. Why? Because one of the main reasons to create price match guarantees is to screw you over.

Wait, what? How can price matching possibly be bad for consumers? After all, it allows consumers to pay smaller prices. It could not possibly hurt consumers, could it?

Unfortunately, it can. Price matching is a form of price fixing, cleverly disguised as a nice gesture toward consumers. The key is how companies act in the bigger picture with price matching in place.

Imagine that you are a company and you have widgets to sell to consumers. You would like to charge your consumers a lot of money to pay for your widgets. However, there is a rival company that sells identical widgets. So if you charge a high price, all of the consumers will go to your rival, and you will make no money. Of course, your competitor has the exact same incentives. As such, you both end up charging very low prices. All of potential profit to be made from widgets has gone up in smoke.

In game theory, we call this situation a prisoner’s dilemma. Broadly speaking, this is a situation where both actors must individually choose whether to act kindly to the other (raise prices) or act uncooperatively (lower prices). Regardless of what the other side does, you have incentive to take the uncooperative action—this is because you can take all of the profits if the other side raises prices and still maintain parity in case they also lower theirs. However, the other side has the exact same incentives. So both of you take the uncooperative action even though this leaves you collectively worse off than if you both took the cooperative action.

If this is confusing, it might help to look at the problem visually:

Still with me? Okay. The point of the pricing prisoner’s dilemma is that it sucks up all of the revenue for widgets and leaves it in the pockets of consumers. This obviously makes those consumers very happy. But the companies would bend over backwards to figure out a way to collude to raise prices to monopoly levels. Yet successful collusion requires preventing the other side from undercutting one’s own price. After all, I don’t want to charge $10 for widgets if you are just going to screw me over by charging $9.

See where this is going yet? Price matching serves as this precise enforcement mechanism. Imagine that I announce that I will match any price you offer. I then charge $10 for my widgets. What are your incentives? Obviously, charging more than $10 is a bad idea, as I will take all of your business. So what if you undercut me instead? Well, you can’t. If you sell your product for $9, discerning customers have no reason to flock to your business because they can also get the widget for $9 from me thanks to my price match guarantee.

What to do? Well, you could also charge $10 and institute your own price match guarantee. For the same reasons as before, I don’t have incentive to undercut you either. We can both sustain the price of $10, well above what we would charging in a competitive environment.

So, despite appearances and Federal Trade Commission approval, price matching is a form of price fixing. It is intentionally designed to reduce competition and increase prices.

This makes the $60 Wii U price matching incident all the better: consumers used a policy designed to screw over consumers to screw over those who instituted the anti-competitive price fixing.

TL;DR: Karma.