Question

Suppose all firms commit a price matching with reward policy. That is, if a buyer finds...

Suppose all firms commit a price matching with reward policy. That is, if a buyer finds firm 1’s price is lower than firm 2’s price, then firm 2 will not only match the difference, but also pay an extra amount to reward the buyer. In this situation, should a firm set its price lower than other firms’, why? Does it want to set its price higher than others?

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Answer #1

In this situation a firm should always set the lowest possible price just covering the variable costs in the short run . This is because if the firm's price is little higher than another firm's price then the firm has to pay a reward to the buyer which is an extra expenditure to the firm . We assume that all buyers are rational here and all goods are homogeneous . So a buyer will always try to purchase the product from the firm which offers the lowest price . So all other firms will ultimately have to come down to that price .

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