From Reuters:
In the past, the FTC has sometimes viewed announcements like this as an "invitation to collude" because it seems likely that the primary target of this announcement is Amazon. If Amazon believes the announcement then it changes their profit calculus, i.e., it reduces the benefit of cutting price.Wal-Mart Stores Inc has informed managers of its roughly 5,000 stores across the United States that they can match prices with Amazon.com Inc and other online retailers, the head of the company's U.S. business said on Thursday.
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ReplyDeleteWal-Mart recognizes Amazon.com as a direct competitor. They realize that Amazon has been extremely successful in marketing of their prices while attracting a steady flow of customers. Wal-Mart sees its competitor eating into its market share and looking for a way to attract Amazon.com customers. They are effectively experiencing a prisoner's dilemma because they want to price low but not too low so that they aren't profitable. What better way to price effectively than to give your competitor an idea of your own pricing capabilities.
ReplyDeleteIn making such an announcement they effectively let Amazon.com know that they are attempting to price match of reduce their prices. This could definitely lead to collusion as Amazon.com could effectively match the prices of Wal-Mart thus not allowing customers to get the best deal possible that could have ensued should a price war had happened. Such an announcement could lead to an indirect price coordination which would only benefit Amazon.com and Wal-Mart.
Wal-Mart, by offering to match on-line retailers prices, has started a price war. Wal-Mart may be reacting to their chief competitor Amazon, which offers a wide variety of products and multiple prices for the same product. Online offers access to a wide number of suppliers willing to compete on low price to obtain a sale. Walmart has begun a price war which may lead to a prisoner’s dilemma. Online shopping has the advantage of instant price comparison. With mobile access to online sites, a shopper in Walmart can find the lowest price on line and ask for the price match. Walmart may get the sale, but at what cost?
ReplyDeleteOnce inside a prisoner’s dilemma, it is difficult to leave. An announcement of no longer offering the price match may steer shoppers to online purchasing. The advertisement of the price match may assure some shoppers that the prices at Walmart are competitive. This strategy is bound to reduce Walmart’s contribution margin due to reduced prices and a reduction in productivity as staff must verify the prices of online offers and make the appropriate adjustments at the registers.
Technology has now changed the rules of pricing from long drawn out price wars to price scuffles. It looks as if the answer is that it might start a new “kind” of price war. A price-matching announcement would seem to mark the beginning of the end of an all-out price war between rival incumbents since neither can gain customers and there is no incentive for either one to undercut the other. The race to the bottom could sometimes be prolonged though, in what appears to be smaller price battles, or skirmishes here and there to slow profit erosion. Software technology now enables dynamic pricing to the extreme. “Pressure from Amazon is forcing retailers to start adopting price intelligence software that scans product prices every 10 minutes and automatically adjusts them according to how low Amazon's prices are (Minsker, 2014).” Amazon will most likely reduce the benefit of cutting prices in one area or product segment and shift it to another area to compensate for any potential losses.
ReplyDeleteReference:
Minsker, M. (2014, 11). Dynamic pricing gains ground. Customer Relationship Management, 18,
13. Retrieved from http://search.proquest.com/docview/1626493833?accountid=8067
I found it very interesting that price matching policies could be considered colluding. Typically, we think of collusion as requiring direct communication between competitors. But this is different. I have to agree with the other posts that I think this presents a prisoners dilemma more than collusion. As described in the book, price wars can be incredibly unprofitable. Amazon may have acted in a first-mover advantage by recognizing that it could price low while Walmart was high. However, once everything reverted back to equilibrium, both companies likely realized that they were better off without engaging in a price war. As mentioned, Walmart now advertises a “Price Catcher” feature on its app that continually tracks competitor prices and refunds the difference automatically. Because it knows Walmart is doing this, Amazon probably is able to raise its prices much closer to Walmart’s pricing.
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ReplyDeleteI have to agree with the other comments, that this is more of a prisoners' dilemma than it is collusion. Technological advancements and online offers have opened a whole new realm of shopping. The advantage of Amazon is the ease at which customers can purchase a wide variety of items. Walmart is taking a huge risk in price matching. There is a point at which the profit loss will outweigh any benefits of keeping a sale. A lot of this issue comes down to the loyalty of customers to each organization. There has been a lot of negative press for Walmart, as opposed to Amazon which is often left with very positive feedback. Never the less, both of these organizations have their own advantages and are very successful. A prisoners dilemma and price match war would not be beneficial to either. They are likely to monitor pricing while continuing to maximize on their own advantages.
ReplyDeleteAlthough Walmart is price matching items from Amazon, they are not price matching items labeled Amazon Prime, as it is part of a club/membership program, and Amazon Marketplace/third party sellers. Why go through the hassle of going to the store, when you can purchase the item directly online? It may seem cheaper, but including the membership fee it is costing you more to purchase it online. The benefit of purchasing the item in store is receiving it immediately. Both companies will continue to compete in having the lowest price, as they are both number one for low prices, compared to the competition. Price-matching might end up costing Walmart money, but it also works against showrooming: If a customer likes something they see in a store, go online on their phones and see that Amazon has it for less, they’re not going to purchase it right there in the store. But if the price is the same, it’s more likely that shopper will just buy it right there.
ReplyDeleteReference
https://consumerist.com/2014/11/13/walmart-tells-all-u-s-managers-they-can-now-price-match-online-retailers-like-amazon/