February 12: Guaranteed profits (The Economist)

February 12, 2015

“Your shopping would have been cheaper elsewhere, so here’s a voucher for the difference.” Anyone who has recently visited a British supermarket will be familiar with such seemingly generous deals, typically extended to shoppers after they pay. The four biggest British supermarket chains all offer some form of price-match guarantee, promising that their customers could not save any money by shopping elsewhere. On the face of it, they seem like a good thing: a sign that fierce competition is lowering prices. But economists have long been suspicious of such promises, which can leave consumers worse off.

The problem is that price-match guarantees can blunt the logic of competition. Suppose a car dealership worries about a rival undercutting its prices and stealing customers. Even if the dealership can...

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