This paper is the first to examine the effect of minimum price guarantees
in a sequential search model. Minimum price guarantees are not
advertised and only known to consumers when they come to the shop.
We show that in such an environment, minimum price guarantees increase
the value of buying the good and therefore increase consumers¿ reservation
prices. This increase is so large that even after accounting for the
fact that some consumers will buy at lower prices, firms profits are larger
under minimum price guarantees than without it. We also show that an
equilibrium where all firms offer minimum price guarantees does not exist
because of a free-riding problem. Minimum price guarantees can only
be an equilibrium phenomenon in an equilibrium where firms randomize
their decision to offer these guarantees.
|Edition||Tinbergen Institute Discussion Paper TI 2009-089/1|
|Publication status||Published - 2009|
|Series||Tinbergen Institute Discussion Paper|