2008:354

B A C H E L O R T H E S I S

Low Price Guarantee, Are YouGuaranteed the Lowest Price

Linda Lundberg

Luleå University of Technology

Bachelor thesis Economics

Department of Business Administration and Social SciencesDivision of Social sciences

2008:354 - ISSN: 1402-1773 - ISRN: LTU-CUPP--08/354--SE

I

ABSTRACT

The purpose of this thesis is to examine the economic and competitive effects from low-

price guarantees in the Swedish electronics market. More exactly, it studies the effects

on price when a LPG is offered in order to find whether the guarantee is tacit collusion-

facilitating, price-discriminating, or simply a signal of low-price. The first two theories

are most likely anti competitive while the third is pro competitive. This thesis does not

provide any conclusive results regarding whether the LPG is pro or anti competitive.

Instead it suggests that the LPG offered by one firm is a signal of low-price, but that it

most likely works as a device to facilitate price discrimination for another firm.

However, the overall effect of the LPG on this market is most likely pro competitive

since the data shows that the general price-level is decreasing towards the price of the

firm which actually has the lowest price.

II

SAMMANFATTNING

Syftet med denna uppsats är att utreda lågprisgarantin som erbjuds av företag på den

svenska elektronikmarknaden, samt dess effekter på pris och konkurrens. Mer exakt

undersöker den effekten på pris för att kunna avgöra ifall att garantin är ett verktyg som

förenklar tysta överenskommelser, prisdiskriminering eller om garantin är en trovärdig

lågprissignal. De två första teorierna är konkurrenshämmande medan den tredje är

konkurrensfrämjande. Resultaten i uppsatsen kan inte ge några entydiga svar gällande

huruvida lågprisgarantin främjar eller hämmar konkurrensen på den svenska

elektronikmarknaden. Istället pekar resultaten på att lågprisgarantin fungerar som en

lågprissignal för ett företag, medan den för det andra företaget istället fungerar som ett

redskap för att lättare kunna prisdiskriminera. Sammanfattningsvis visar denna studie att

effekterna av en lågprisgaranti är mestadels konkurrensfrämjande eftersom resultaten

visar en generell prisminskning över tiden.

III

TABLE OF CONTENTS

ABSTRACT ...................................................................................................................... I 

SAMMANFATTNING ....................................................................................................II 

TABLE OF CONTENTS ............................................................................................... III 

LIST OF FIGURES AND TABLES ................................................................................V 

CHAPTER 1 INTRODUCTION...................................................................................... 1 

1.1 Background............................................................................................................. 1 

1.2 Purpose ................................................................................................................... 2 

1.3 Method.................................................................................................................... 2 

1.4 Scope and Limitations ............................................................................................ 3 

1.5 Outline .................................................................................................................... 3 

CHAPTER 2 LITERATURE REVIEW AND THE ELECTRONICS MARKET .......... 5 

2.1 Earlier Studies ........................................................................................................ 5 

2.1.1 Anti Competitive Studies ................................................................................ 5 

2.1.2 Pro Competitive Studies .................................................................................. 6 

2.2 LPG on the Electronics Market in Sweden ............................................................ 7 

CHAPTER 3 THEORY.................................................................................................... 9 

3.1 Basic Market Theory .............................................................................................. 9 

3.2 Theories of the Effects of LPG’s.......................................................................... 11 

3.2.1 Tacit Collusion .............................................................................................. 11 

3.2.2 Price Discrimination...................................................................................... 12 

3.2.3 Low-price Signal ........................................................................................... 14 

3.3 Summary............................................................................................................... 16 

CHAPTER 4 RESULTS AND ANALYSIS .................................................................. 17 

IV

4.1 Data Collection..................................................................................................... 17 

4.2 Reliability and Validity ........................................................................................ 18 

4.3 Results .................................................................................................................. 19 

4.3.1 Time-Series Data ........................................................................................... 19 

4.3.2 Cross-sectional Data ...................................................................................... 29 

4.4 Summary of Results ............................................................................................. 30 

CHAPTER 5 CONCLUSIONS...................................................................................... 32 

REFERENCES ............................................................................................................... 34 

APPENDIX 

V

LIST OF FIGURES AND TABLES

Table 3.1. Possible Effects of LPG’s.............................................................................. 16 

Table 4.1. Category and Models of the Products in the Time-series Dataset................. 18 

Figure 4.1. Price Development of a Sony Ericsson W890i ............................................ 20 

Figure 4.2. Price Development of a LG KU990 Viewty ................................................ 21 

Figure 4.3. Price Development of a Panasonic TH-42PX80E ....................................... 21 

Figure 4.4. Price Development of a Samsung LE-40F866BD ....................................... 22 

Figure 4.5. Price Development of a Microsoft XBOX360............................................. 23 

Figure 4.6. Price Development of an Electrolux Ultra Silencer ZUS3366 .................... 24 

Figure 4.7. Price Development of an Apple Ipod Classic Silver.................................... 25 

Figure 4.8. Price Development of a Canon Digital IXUS 80 IS .................................... 25 

Figure 4.9. Price Development of a Canon EOS 450D 18-55 IS ................................... 26 

Figure 4.10. Price Development of a Canon EOS 400D + 18-55/3,5-5......................... 27 

Figure 4.11 Cross-sectional Data of Twenty Products ................................................... 29 

Table 4.2 Price-level Conclusions Regarding the Static Analysis ................................. 30 

1

CHAPTER 1

INTRODUCTION

1.1 Background

The competition for consumers is in many markets considered as more extensive than

ever before not least because of the increasing transparency in prices, which partly is a

result of the modern e-commerce society. A price strategy which is becoming more and

more common in many competitive markets is the so called low-price guarantee (LPG).

The LPG is one of many strategies which are used by firms to differentiate themselves

and to advertise to the consumers that they are guaranteed that the price paid is the

lowest available on the market. When a customer provides evidence of a lower price

elsewhere, immediately the firm match or beat any lower price of a competitor

depending on which LPG is offered.1 The LPG can either be identified as a promise to

the consumers to match any lower price, price-matching guarantee (PMG), or promise

to beat the lower price, price beating guarantee (PBG), where the consumer is refunded

with more than the difference in price.

What does a LPG actually guarantee? It does not guarantee to the consumer that the

firm is offering the lowest posted price available on the market. However, it gives the

consumer the ability to buy the good at the firm in question at the lowest price that the

consumer can find elsewhere. Although conventional knowledge tends to support the

idea that the effects of LPG’s are pro competitive (what could be more competitive than

sellers guaranteeing their low prices by promising to match the prices of any

competitor?) there are a lot of studies on the subject that suggest that the effects of

LPG’s are anti competitive, e.g., Salop (1986) claims that prices will rise significantly

in an oligopoly market where firms adopt a LPG, this because it will facilitate tacit

1 LPG’s comes in various different shapes depending on the criteria of the guarantee. As a result the

LPG’s go by several names in the literature; beating competition, beat or pay commitment, meeting

competition clause, meet-or-release clause, most-favored-customer clause, best-price provision,

guaranteed-lowest price policy, competitor –based pricing policy, price guarantee policy, etc.

2

collusion. Belton (1987) and Hirshleiffer (1988) presented another view. They

suggested that the LPG is used as a device to facilitate price discrimination between

informed and uninformed consumers. Edlin (1997) as well uses this argument and

suggests that the LPG should be seen as an unfair strategy.

There exists numerous theoretical studies on this subject, but the empirical works are

scarce and far from conclusive. Srivastava and Jain (2001) discusses that there is a need

to compare empirically the prices of firms that offer a LPG with the firms that do not.

Such a study will have important implications not only for theoreticians but also for

regulatory agencies since it will show weather the LPG have had a positive or negative

effect on the competition on the market.To include both firms with and without a LPG

is therefore important in order to analyse the potential effect from offering a LPG.

Therefore, this thesis will investigate what the effects of LPG’s are on the posted prices

of four firms in the Swedish electronics market. Two firms have adopted a LPG while

two have not. This is done in order to answer the main questions in this study; do firms

with a LPG have higher or lower prices than firms without a LPG? Are the prices

colluded in some fashion? Does the LPG facilitate tacit collusion or price

discrimination? Or is the LPG only used as a credible low-price signal? In other words,

is the LPG offered pro or anti competitive?

1.2 Purpose

This thesis examines the economic and the competitive effects of a LPG on the Swedish

electronics market. More precisely, this thesis aims at investigating the LPG’s on the

Swedish electronics market in order to find whether they are tacit collusion-facilitating,

price-discriminating, or simply a signal of low-price.

1.3 Method

This study will be based on a literature review, but some quantitative data will also be

used. A comparison of prices on a selection of products from four different electronics

firms in Sweden will be conducted. First, prices for ten different products will be

collected on a weekly basis for five weeks.2 Second, a broader comparison of prices on

2 The data will be collected from four different web sites, each belonging to one of the four stores that is

included in the comparison.

3

twenty different products is collected at a single occasion. The data will be collected

from four different websites, each belonging to one of the four stores included in the

analysis.3 Two of the four stores included in this study, ONOFF and El-Giganten, offer

a LPG, while Siba and Expert do not. The data will be analyzed in order to see if the

prices can support any of the theories related to the LPG.

1.4 Scope and Limitations

The investigation will be concentrated on the effects on prices and competition when a

LPG is offered on the market for electronics in Sweden. The LPG is well established on

this market, which is why this particular market is examined. Since the thesis only

examines the electronics market in Sweden, the conclusions are only valid on this

market and cannot perfectly be applied on any other market.

The study will include El-Giganten, ONOFF, Siba and Expert. The reason why these

chains are chosen is because two of them offer a LPG while two do not. Furthermore,

they have the largest assortment and are well established all over Sweden. However,

since not all firms in the market are included the results in the study cannot be

generalized over the entire Swedish electronics market. El-Giganten and ONOFF have

adopted a PMG, for that reason the focus will be on this kind of guarantee. It will not be

any focus on the different criteria or kinds of LPG’s so therefore the term which is

being used throughout this thesis is LPG. Furthermore, there exist several theories on

why firms use a LPG and what the effects are, this study will discuss three of them; tacit

collusion-facilitating, price-discriminating and low-price signaling.

1.5 Outline

The thesis is divided into six chapters. The first chapter gives an introduction to the

thesis. Chapter two presents a literature review, where earlier studies that are relevant to

the thesis will be presented. Furthermore, the LPG’s offered in the electronics market in

Sweden will be discussed. Chapter three provides relevant basic market theory and an

investigation of the theories; tacit collusion, price discrimination and signal of low

prices, in relation to the LPG. Chapter four presents the results from the data collected.

Furthermore, it describes the data collected for the thesis and the method in which they

3 (Elgiganten, 2008), (Expert, 2008), (Onoff, 2008), (Siba,2008)

4

were collected. The results will as well be analyzed from two different perspectives;

first the effects on price and second the competitive effects. Finally, in chapter five

conclusions regarding the effects of LPG’s in the Swedish electronics market will be

made.

5

CHAPTER 2

LITERATURE REVIEW AND THE ELECTRONICS MARKET

This chapter will present earlier literature regarding the use of LPG’s. The literature is

divided into two broader sections, an anti competitive and a pro competitive.

Furthermore, a section about the LPG’s offered in the electronics market in Sweden will

as well be included in this chapter.

2.1 Earlier Studies

The theoretical literature on LPG’s is quite extensive while the empirical work is scarce.

At this moment, there are just a handful of published empirical studies and the results

are not unambiguous. This is most probably because firms are trying to hide any

activities which could be a restrain on competition from buyers and antitrust authorities

(Fatas and Mañez, 2007). Several propositions have been explored in order to try to

explain why firms offer a LPG. Most of the previous literature focuses on the PMG, and

the first studies on the guarantee showed that it can deter price competition. Because of

this anti competitive view there exists a lot of legal as well as economic literature on the

subject. Most legal literature focuses on the LPG’s as anti competitive, while the

economic literature as well examines a pro competitive view in addition to the anti

competitive.

2.1.1 Anti Competitive Studies

Salop (1986) argued that LPG’s facilitate cartel pricing and leads to higher prices since

the incentive to undercut a rival’s prices disappear. A cut in price with the attempt to

win market shares will automatically be matched by all firms which have adopted a

LPG. Belton (1987) and Hirshleiffer (1988) presented another view, still anti

competitive. They suggested that LPG’s was used as a device to price-discriminate

between informed and uninformed consumers. This means that firms which offers

LPG’s are providing discounts to the consumers that are aware of, and search for, lower

prices while the consumers who do not is doomed to pay a higher price. Their research

6

can be associated with Stigler’s (1961) and Salop and Stiglitz (1977) findings that there

are high transaction costs related to the search for information regarding the price. Corts

(1996) also analyzed the possible use of LPG’s as price discriminating devices but in a

more general fashion.

Hess and Gerstner’s (1991) contribution to the literature was that they presented the first

published empirical study. They performed a time-series analysis on a grocery market

in which two firms adopted a LPG directed towards a third firm. Their findings were

that the price increased slightly after the LPG was adopted. This suggested that the LPG

was used as an anti competitive price-collusion strategy since it facilitated for firms to

increase prices towards a monopoly level. Edlin (1997) also argued that the LPG

facilitates for firms to raise their prices. Furthermore, he uses the argument by

Hirsleiffer (1988) to suggest that the LPG’s should be seen as an unfair strategy.

Although Hviid and Shaffer (1999) accentuate that prices will not reach monopoly

levels when there are transaction costs, they still point out that price can be above

competitive levels. Their research showed that the price rose in the markets when a LPG

was introduced. Edlin and Emch (1999) had an opinion, after summing up their

literature study that, adopting a LPG is a good substitute of actually having low prices.

They are therefore suggesting that the LPG’s are anti competitive. Arbatskaya et al.

(1999) studied the effects of LPG’s on advertised tire prices using data on prices of a

specific model of tires collected from the U.S. Sunday newspaper. They conclude that

the firms’ own LPG does not have an effect on the firm’s own prices, but that an

increase in the percentage of firms offering a LPG tends to raise the firms advertised

price. Moorty and Winter (2002) provide results that partly strengthen the traditional

view that LPG’s are collusive devices. They agree with Salop that the collusive pricing

is both a Nash equilibrium and a dominant strategy.

2.1.2 Pro Competitive Studies

If the LPG is seen as a pro competitive strategy it implies that the offer of LPG’s on the

market would lead to lower price closer to the marginal cost. Jain and Sirvastava (2000)

built their model upon consumer heterogeneity meaning that there are both informed

and uninformed consumers in the market. Depending on the symmetries in the cost

structures of all firms the LPG could work in two different ways. When there is firm

symmetry, meaning that all firms carry about the same costs and all firms would adopt a

7

LPG, the effective price paid by the informed consumers would be unique and the same

as the lowest posted price on the market. When there are instead asymmetries in the cost

structure of the firms, i.e., there exists both high priced firms and low priced firms, the

cost for a high priced firm to adopt a LPG would offset the increase in revenues which

creates credibility to the LPG as a low-price signal. Jain and Sirvastava’s (2000) model

is more developed in the next chapter, the choice to present this model in a more

detailed fashion is based on the belief that it will give a deeper understanding in which

way a LPG could work as a signal of low prices.

Moorthy and Winter’s (2002) model is quite similar to Jain and Sirvastava’s although

they assume that there are just two firms on the market. Their conclusions regarding the

effects of a LPG when there are firm asymmetries is the same as Jain and Sirvastava’s.

Their conclusion when the firms have symmetric cost structures and both firms adopt a

LPG is also the same; the effective price paid by the informed consumers would be the

lowest posted price on the market. But in addition they state that it does not necessarily

mean that the posted price is on a perfectly competitive level. Their conclusions say that

the LPG could be both a credible low-price signal but as well it could facilitate tacit

collusion under some circumstances.

Mañez (2006) studied the effects on price when a LPG was adopted by one of three

supermarkets in the UK. During a period of one year and four months he collected

price-data on 27 occasions on 46 products from the three supermarkets included in his

study. Mañez investigation was done in order to investigate if the LPG adopted could be

connected to one of the three most common theories associated with the use of a LPG.

His conclusions were not consistent with most of the earlier studies which suggests that

the LPG is used as a device to facilitate tacit collusion. Instead he concluded that the

LPG was a credible signal of low prices.

2.2 LPG on the Electronics Market in Sweden

In Sweden the LPG is not as common as in for example the US or the UK, where LPG’s

can be found in almost all markets (Arbatskaya et al., 2004). An increase in the use of a

LPG in Sweden could though be observed if one studies the cases which are brought up

to the market court. Several of the cases represent lawsuits where one firm is suing

another firm for statements like "Always the lowest prices" or "We have the best prices"

8

(Market Court, 2008). In Sweden the LPG is probably most common in the market for

electronics but can as well be seen in other markets.

At the Swedish electronics market there exists a number of actors; El-Giganten,

ONOFF, Siba, Expert, Expert Stormarknad, ELON, Media Market and Euronics.

Moreover, there exist a number of smaller actors and a great deal of actors that only

operate on the Internet. The physical market that includes the electronics chains first

mentioned is the one that is discussed in this thesis. This market can also be defined as

“the market for electronics in Sweden”, “the electronics market in Sweden” and “the

Swedish electronics market” which is used several times throughout this study. Mainly

because of the limited number of firms and the homogenous products, this market could

be classified as an oligopoly market. The firms collectively have market power and due

to the difficulties to establish a brand new chain on the physical market it acts as entry

deterrence.

The chains that have adopted a LPG are El-Giganten, ONOFF and Expert Stormarknad.

The first two; El-Giganten and ONOFF state their use and the conditions of their LPG

on their websites. The LPG adopted by the firms in this study is a local PMG which is

only valid towards physical local firms. Furthermore the guarantee is valid for 30 days

from purchase and is only activated for consumers that hand in proof of a lower price at

another firm.

The two firms offering a LPG included in this study claim that they are the cheapest in

the market. ONOFF declare on their website, “If you buy your goods from us you can

be sure that you pay the lowest price possible for the product you’re after”. El-Giganten

makes a similar statement “If you would find the good cheaper elsewhere, we refund the

difference in price”. (ONOFF, 2008) Their motives to use a LPG would therefore

indicate a signaling action taken by the firms in order to inform the consumers of their

low prices. However, the theory regarding the LPG’s suggests that there can be other

motives which are not pro competitive. The next chapter will examine three theories

which provide explanations to the possible effects of a PMG.

9

CHAPTER 3

THEORY

The first part of this chapter will present basic market theory which includes the models

of perfect competition and oligopoly. Furthermore, it will discuss three specific theories

which could be the effect of a LPG; first, tacit collusion, second, price discrimination

and third low-price signaling. A deeper explanation of the theories and how a LPG can

work will be provided when each of the theories is fitted into a model selected from

earlier studies. The Swedish electronics market that is examined in this thesis may not

fit perfectly into these models, but there will still be a foundation to rely on when the

analysis will be done.

3.1 Basic Market Theory

Economists use the model of perfect competition, which is known as an ideal market, as

a tool for comparison with real-world markets. There are markets that can be described

as perfectly competitive, while many markets cannot. The perfectly competitive markets

are recognized through a number of conditions; first, firms freely enter and exit the

market which often results in a large number of firms in the market. Second, products

are homogenous meaning that all firms sell identical products which results in

indifferent consumers; the consumers do not care from which firm they buy their goods.

Third, there is perfect information about the price and quality of goods, meaning that

both buyers and sellers know the price and quality on a good charged by firms.

Consumers therefore know if a firm is charging a higher price than other firms. Fourth,

there are low transactions costs, meaning that the costs associated with making a

purchase are not expensive, difficult or time consuming (Perloff, 2004).

When these conditions are satisfied not a single consumer or firm can affect the market

price, which results in a horizontal demand curve. This market does not have any

welfare losses which could be the explanation to why economists use this market as the

benchmark when analyzing many real markets (Perloff, 2004).

10

When the conditions of a perfectly competitive market are not satisfied, the market can

instead be called an imperfectly competitive market. Monopoly, monopolistic

competition and oligopoly are three market forms that could be referred to as imperfect.

If there is only one firm on the market; a monopoly, the seller can affect the market

price by reducing its output of the good it supplies. This is because there exists no

substitutes, and the firm faces a downwards sloping demand-curve. This firm has

market power and is the price setter on the market. Markets with free entry and

differentiated products could be referred to as monopolistic competition. Monopolistic

because of the firms market power and ability to determine the price, but competitive

since there is free entry into the market. Free entry implies that any short run profits

signals to other firms to enter the market. In the long run profits will therefore be zero.

It is a market where the consumers have preferences for one good over another because

they consider brands or products as imperfect substitutes (Carlton and Perloff, 2005).

Since the electronics market in this study could be referred to as an oligopoly, a more

careful presentation of this market form will follow below. Carlton. and Perloff. (2005;

157) define an oligopoly as follows; “a small number of firms acting independently but

aware of one another’s existence”. The oligopoly market is known through some

conditions; consumers are price takers, firms could supply both differentiated and

homogenous products. Entry in oligopoly markets are unusual since it is related with

high costs, implying that the number of firms is close to constant and most commonly

there are only a limited number of firms in the market. They know that they can affect

the market price, and therefore also the competitors profits. In other words, one firm is

sensitive to the actions of all other firms. Due to this an oligopoly cannot, unlike the

firms in a monopoly or perfectly competitive markets, ignore other firms’ actions.

Instead they must consider the rival firms’ behavior to be able to maximize their own

profits. Together they have market power meaning that they can set prices higher than

the marginal cost if they in some way can coordinate their actions (Carlton and Perloff,

2005). There are many strategies in which firms can coordinate their actions; three of

them are the theories, tacit collusion, price discrimination and low-price signaling which

are examined in this thesis.

11

3.2 Theories of the Effects of LPG’s

The economic theory has been analyzing the effects of a LPG from several different

perspectives. The most suggested theories are that it either works as a signal of low

prices, as cartel-facilitating devices or as price discrimination devices. If the low price

signal is credible it works in a pro competitive way, meaning that it facilitates the price

search and minimizes the transactions costs for consumers. The anti competitive view

refers to the LPG as either a collusion-facilitating device, which implies that it help

firms in an oligopoly to collude and act in a coordinated fashion, or as a price-

discriminating device (Salop, 1986).

3.2.1 Tacit Collusion

Collusion is an agreement, usually secretive, which describes a behavior where two or

more individuals deceive or mislead other individuals of their legal rights just to gain an

unfair advantage. In the study of economics, collusion takes place in a market where

competitors cooperate for mutual benefits; most commonly in an oligopoly. A decision

of a few firms to collude can significantly impact the market price. Cartels are a special

case of explicit collusion, meaning that there exists an agreement or a contract on how

the firms should act after collusion. Collusion which is not obvious on the other hand, is

known as tacit collusion, meaning that the coordinated actions of firms in an oligopoly

despite the lack of an explicit cartel agreement act for their cooperative profits (Carlton

and Perloff, 2005).

There exists studies which refer to the LPG as a device to facilitate tacit collusion; this

section will present Salop’s research and the method he used to illustrate that the LPG

actually could work in a collusion facilitating fashion. Cooperation such as tacit

collusion in an oligopoly is usually described with the use of game theory. The theory

describes the difficulties that can arise when one part is planning its own best strategy

taking another parts strategy into consideration. Salop (1986) illustrated through game

theory that the LPG is a device to facilitate tacit collusion. In the ordinary single period

game there exist difficulties to reach a tacit cooperative agreement due to the firms’

incentives to choose the dominant strategy; the non cooperative strategy. Salop

incorporated the use of a LPG into his model, with the LPG the choice of strategies

changes. The cooperative point becomes dominant, this since the LPG is a promise from

a firm to meet any attempt of competition from their rivals which reduce the firms

12

incentives to cut prices. All firms know that if they set a price lower than the other

firms’ prices all firms will follow, meaning that a firm cannot even make short run

profits if it is lowering its prices. The choice of strategy therefore becomes the

cooperative since the firms want to maximize its profits. The cooperative point becomes

credible when no firm can do better off if choosing another strategy. Thus, the game

with a LPG makes the cooperative point a Nash equilibrium (Salop, 1986).

This study will support the theory that the LPG works as a device to facilitate tacit

collusion if the prices in the study are coordinated in some way. A first sign of

coordination is that firms have almost identical prices. A second sign is if the firms are

correcting their prices towards a cooperative higher price-level.

3.2.2 Price Discrimination

A firm always wants to increase its profits and one strategy that is often used for this

purpose is price discrimination. However there exist some criteria for a firm to be able

to price discriminate. First, market power is a must, without market power a firm is

unable to charge any consumer a higher price than the competitors’ price. Second, the

price discriminating firms must prevent or limit resale. If the consumers who pay a

lower price are able to resell the good to the consumers that pay a high price, the firm

would lose all their sales from the high-charged consumers, since they instead would

buy their good from the low-charged consumers (Carlton and Perloff, 2005).

There exist many ways in which firms can charge non uniform pricing; the first

classification narrows them down to three different types of price discrimination.4 First,

the perfect or first-degree price discrimination in which each and every consumer pays a

different price. The price paid by a consumer reflects their highest willingness to pay for

a good. Second, the second-degree price discrimination where the price paid for each

and every good depends on the number of goods purchased. Third, the third-degree

price discrimination where each group of consumers is charged different prices per unit

purchased (Carlton and Perloff, 2005).

4 Different prices to different consumers or groups of consumers.

13

The LPG is classified as third-degree price discrimination; this is the reason why the

rest of this section will focus on this type of non uniform pricing. The firm which adopts

a LPG may take advantage of the fact that there are both informed and uninformed

consumers in the market. The firm set a high-list price which the consumers must pay as

long as they do not complain that the price exceeds the price in another store. If a

consumer complains about the price and bring evidence of a lower price elsewhere the

store match the lower price. This pricing strategy gives the firms possibility to price

discriminate between informed and uninformed consumers. Why do uninformed

consumers exist if they have to pay a higher price, should not everyone be informed if

this is the case? The simplest explanation is that individuals are different. All

individuals value time different, some take that extra time and make that extra effort to

search for the information that is needed to find the lowest prices and to activate a LPG.

The more informed a consumer is in a market where there is not perfect information, the

higher is the transactions cost.

Corts (1996) general, but descriptive model of the LPG as a price discriminating device

goes as follows. In the model heterogeneous firms compete for two groups of

consumers; informed and uninformed.5 The informed consumers consider effective

prices, in a market without a LPG they only purchase from the low-priced firms. The

uninformed consumers only consider the posted prices. The LPG however gives the

high-priced firms ability to compete with the low-priced firms for the informed

consumers. If a LPG is adopted on the market the informed consumers becomes less

important for the low-priced firms since they can go to a high-priced firm and purchase

the good for the same price, due to the price matching. Furthermore this increases the

low priced firms’ incitement to set their price closer to the uninformed consumers

demand optimal price. This act has two different outcomes depending on the informed

consumers’ demand-elasticity. If their demand is relatively elastic at the posted price,

the low-priced firms increase its price and other firms will follow. If they instead have

inelastic demand the low priced firms decrease its’ price and other firms will follow.

Corts (1996) therefore shows that the LPG can both be anti competitive and pro

competitive. In the relevant market the consumers’ demand-elasticity is relatively

5 Corts (1996) refer to sophisticated and unsophisticated consumers.

14

elastic mainly due to undifferentiated products. This indicates that there will be an

increase in prices which is the effect that speaks for the LPG as anti competitive.

This study will support the price discriminating theory if the prices belonging to the

firms which offer a LPG are higher than the prices belonging to the firms without a

LPG. Since there are two firms in this study which have adopted a LPG, the outcome

could be that one of them actually have the lowest posted prices and do not price

discriminate, this due to the fact that their LPG would never be activated. If the other

firm with a LPG on the other hand has higher posted prices than the firm with the

lowest prices, this would indicate that this firm is price discriminating every time their

LPG is activated. For this study to be able to reject this theory, meaning that none of the

two firms offering a LPG is price discriminating, the outcome must be that they will

have close to identical posted prices and that their prices are lower than all other firms’

prices. This outcome could as well be referred to as a signal of low-price.

3.2.3 Low-price Signal

Carlton and Perloff (2005) define signaling as an action taken by an informed individual

to send information to an uninformed individual. If there is not perfect information in a

market, there is instead limited information. This implies that one part, let us say, the

firms, possesses more information about the prices than the consumers. If this is the

case firms can take advantage of that by charging the uninformed consumers a higher

price than the price charged by other firms.6 If a firm knows that there is limited

information about the prices, or that the information is associated with high transaction

costs for the consumers, the firm could send a signal to the consumers which indicate

that it has the lowest prices. The LPG can therefore work as an important tool to attract

consumers and to win market shares, if the motive of using a LPG is to serve the

consumers with the information needed. If this is the case the strategy is both credible

and pro competitive (Jain and Sirvastava, 2000).

Jain and Sirvastava (2000) build their model on the following assumptions; an informed

consumer choose a firm based on its’ posted price and on whether a firm is offering a

LPG or not, while an uninformed consumer make their choice based on their 6 Uninformed consumers are consumers which do not search for information if it is associated with high

transactions costs.

15

expectations on the price. The uninformed consumers expect a firm which offers a LPG

to have lower posted prices and when the uninformed consumers have decided where to

buy the good they pay the posted prices. The firms are faced with two separate

decisions. First, firms decide if they should adopt a LPG or not, then they decide on the

posted prices. Without a LPG in the market, firm asymmetry would give several optimal

prices. If all firms on the other hand would adopt a LPG, the effective price paid by the

informed consumers would be unique and the same as the lowest posted price on the

market. When there instead are firm asymmetries and a firm with high prices adopts a

LPG its’ incentives is to increase the competition for the uninformed consumers that

have a more inelastic demand. This strategy could be costly for the high priced firms,

they may succeed to increase their share of uninformed consumers but at the same time

the effective price paid by the informed consumers decrease.7 In other words, “when the

decrease in revenues derived from lower effective prices for informed consumers more

than offsets the increase in revenues obtained from selling to uninformed consumers”

the strategy is expensive for the high priced firms (Mañez, 2006; 148). In this case the

high priced firms are better off without a LPG. Hence, this creates credibility to the

LPG as a signal of low prices, the uninformed but rational consumers know that only

low priced firms will adopt a LPG because the high priced firms will be punished when

the informed consumers activates the LPG.

The analysis will support the theory that the LPG works as a low-price signal, if the

result from the data shows that the firms which offer a LPG actually have lower posted

prices than the firms without a LPG. Then the low-price signal is credible for at least

one of them; the firm which have the lowest prices of the two, the other firm is price

discriminating. For this study to completely support this theory, meaning that the LPG

is a credible low-price signal for both firms the outcome must be that these two firms

have close to identical posted prices and that their prices are the lowest available in the

market.

7 When the informed consumer activates the LPG the price decreases.

16

3.3 Summary

Table 3.1 is summarizing the most important conclusions from the three theories

examined in this chapter. The table first shows that if the prices are high and

coordinated, the effect of the LPG’s is tacit collusion. This outcome is anti competitive

since the consumers are worse off paying a higher price. It is expected that the LPG is

activated if consumers find a lower price anywhere else. Second, the table exhibits that

if the prices of firms which offer a LPG would be high; the effect of the LPG’s is price

discrimination. This theory as well assumes high prices which are anti competitive and

negative for consumers. Furthermore, since there are lower prices available at other

firms, the LPG is expected to be activated. Lastly, the table shows that if the prices of

firms which offer a LPG are the lowest available in the market the LPG is a credible

low-price signal. If this theory is the case, the LPG is not expected to be activated since

the price already is the lowest available.

Table 3.1. Possible Effects of LPG’s

Theory Price Competition Activation of the LPG*

Tacit collusion-

facilitating device

Coordinated high prices Anti Yes

Price-

discriminating

device

High prices in order for the

guarantee to be activated.

Anti Yes

Low-price signal

Low prices in order for the

signal to be credible.

Pro No

*Activation of the guarantee indicates that the informed consumer uses the guarantee.

17

CHAPTER 4

RESULTS AND ANALYSIS

This thesis aims at investigating the effects on prices and competition when a LPG is

being offered at the Swedish electronics market. When effects on prices can be observed

it leads to certain conclusions regarding the effects on competition. Furthermore, it will

provide a base to rely on in order to find whether the LPG’s are tacit collusion-

facilitating, price-discriminating, or simply a signal of low-price.

4.1 Data Collection

The data used in this thesis are prices directly collected by the author from four different

websites, each belonging to one of the four stores included in the analysis. ONOFF and

El-Giganten have adopted a LPG, while Siba and Expert have not. Although the LPG is

not valid towards the e-commerce, a decision was made to use the internet-prices in the

dataset anyway. This decision is built upon; first, the difficulties to collect the physical

prices from the firms when not even all firms in the study are located in this area.

Second, the assumption that the internet-prices give a general price picture of the firms

included in the analysis, and third, firms included in this analysis declare on their

website that they reserve themselves against local price differences. Since this study is

for a more general purpose, to investigate the electronics market in Sweden, it was more

appropriate to compare the general price picture of these firms.

There are two datasets, the first consists of six observations on ten different products

and the second consists of a single observation on the first ten and ten additional

different products. The reasons to why there are two different datasets are the

difficulties that rose when the data was first collected; it was very hard to find the exact

same products at all four firms. This could be an attempt for the firms to differentiate

themselves in order to win market power or decrease the transparency in prices. Due to

this, prices from different firms can be missing for some of the goods. For that reason a

comparison including more products can be useful. In the second dataset, if a firm does

18

not have a specific good it is marked with an X instead of the price. When selecting

which products to include in the study an attempt to choose classical, regular or popular

goods from different categories of products was done, in order to get as relevant prices

as possible.8 The goods included in the datasets are presented with categories and

models in tables. Table 4.1 presents the time-series dataset meanwhile the expanded

static dataset is presented in Appendix.

Table 4.1. Category and Models of the Products in the Time-series Dataset

Category Model

Mobil phone Sony Ericsson W890i

Mobil phone LG KU990 Viewty

TV Panasonic TH-42PX80E

TV Samsung LE-40F86BD

TV game (console) Microsoft XBOX360 Premium

Vacuum cleaner Electrolux Ultra Silencer ZUS3366

MP3 Apple IPod Classic 80GB Silver

Compact Camera Canon Digital IXUS 80 IS

System Camera Canon EOS 450D 18-55 IS

System Camera Canon EOS 400D + 18-55/3,5–5,6

4.2 Reliability and Validity

This section will discuss some aspects that could affect the results in this study. First,

not all firms on the physical electronics market were included in this examination.

Secondly, the examination did not take place when the LPG was first introduced in this

market, therefore this study cannot say anything about the price level before and after

the LPG. Furthermore, the data was collected under a short period of time and the

number of products was limited. The presence of these limitations can affect some of

the results and makes it hard to statistically proof the results; however the conclusions

of this study can indicate what the possible effects of a LPG in this market are. The data

have been analyzed with the LPG as a starting point. However, the price-changes can as

well be a result of other factors. It could for example be the high speed of technical

8 In order to find classical, regular or popular goods, a search on both www.prisjakt.se and

www.pricerunner.se was done. These are two often used websites that list all electronics available in the

Swedish market.

19

development which in its turn regularly provide the market with new products and lead

to changes in individuals’ preferences.

4.3 Results

The following section will look at the effects of a LPG on the posted prices of all firms

in order to answer the main questions in this thesis. Do firms with a LPG have higher or

lower prices than firms without a LPG? Are prices corrected towards any cooperative

point which would indicate if the LPG is a device to facilitate tacit collusion?

4.3.1 Time-Series Data

The analysis of this dataset will first look at the price-level between the four firms on

the ten products, and secondly it will try to track down any signs of cooperative pricing

behavior that would support if the LPG is a device to facilitate tacit collusion. Prices

that are close to identical and prices that are corrected towards a cooperative point are in

this study interpreted as signs of a cooperative behavior. An analysis of each and every

product will follow below.

Figure 4.1 show price-data for a popular mobile phone, Sony Ericsson W890i. El-

Giganten is the lowest priced firm in the first week and all other firms have the exact

same price. The difference in price between the firms is big; El-Giganten’s price is 14.3

percent lower than the price of the other firms.9 The prices in Figure 4.1 show signs of

some cooperative pricing, since ONOFF, Siba and Expert initially have identical prices.

Moreover, they seem to lower their price towards the price-level of El-Giganten which

is the lowest priced firm. Although the prices are coordinated, it does not seem to be in

a collusive way, meaning that the firms are not cooperating for higher profits. Instead

the prices are corrected towards a lower price. This is an observation which does not

seem to be anti competitive since the price-level is decreasing over time. El-Giganten is

in a position where they could make a decision to increase its price to the same price-

level as the other firms. That could be an act which would indicate that the LPG is tacit

collusion-facilitating since it would lead to higher joint profits. However, El-Giganten’s

strategy to use a LPG seems to be a low-price signal.

9 3790-3249=541 541/3790=0.143 =14.3%

20

Figure 4.1. Price Development of a Sony Ericsson W890i

The price-data in Figure 4.2 is as well prices of a popular mobile phone, LG KU990

Viewty. The price-level in the first week shows that the price of the lowest priced firm,

El-Giganten, is as much as 17.7 percent lower than the price of the highest priced firm,

Siba, which do not offer a PMG.10 In the fifth week El-Giganten still has the lowest

price although the difference in price to the highest priced firm, Expert, has decreased to

10.6 percent.11 The prices follow a similar pattern as in Figure 4.1 above, since the

prices are corrected in a coordinated way. ONOFF and Siba is lowering their prices

towards the prices of the lowest priced firm; El-Giganten. El-Giganten answer through a

further decrease in its price, this could count as a sign of a low-price signal. ONOFF on

the other hand is first decreasing its price a bit more than the two firms not offering a

LPG and is then increasing its price to the same level as those firms. ONOFF’s act show

signs of collusive pricing behavior, if El-Giganten as well would increase its price

towards the price-level of the other firms it would be a sign of tacit collusion. ONOFF’s

strategy seems to be; first, an attempt to facilitate tacit collusion and second, price-

discriminating. They can compete both with firms not offering a LPG and the lowest

priced firm in the same time, since they lower their price to the level of El-Giganten

when the LPG is activated.

10 4490-3695=795 795/4490=0.177 =17.7% 11 3990-3569=421 421/3990=0.106 =10.6%

21

Figure 4.2. Price Development of a LG KU990 Viewty

Figure 4.3 shows price-data on a TV, Panasonic TH-42PX80E. The price-level between

the firms in this figure is identical except in week three where El-Giganten has a price

that is 16.8 percent lower than all other firms.12 The data exhibits collusive pricing with

the exception of a price-peak of all firms but El-Giganten in week three. The increase in

price could be an attempt from ONOFF, Siba and Expert to cooperate for higher joint

profits. However El-Giganten did not follow the increase in price which led to the other

firms lowering its prices once again.

Figure 4.3. Price Development of a Panasonic TH-42PX80E

Figure 4.4 illustrates price-data on a TV, Samsung LE-40F86BD. In the first week three

firms were offering this product, El-Giganten, ONOFF and Siba. El-Giganten removed

the product from their assortment before week two. ONOFF decreased the price of the

product in week two with 7.3 percent and then removed the product from their

12 11890-9890=2000 2000/11890=0.168 =16.8%

22

assortment.13 Siba maintained the initial high price-level until week five they then

decreased the price with 10 percent.14 It is difficult to go through with an analysis when

there is just one firm offering the product, therefore it will not be discussed further

about this figure.

Figure 4.4. Price Development of a Samsung LE-40F866BD

Figure 4.5 show price-data for only two firms on a TV-game, Microsoft XBOX 360.

The prices are interesting although there are only data from firms which offers a LPG. It

does not show any signs of collusive prices, instead it exhibits a difference in price

between the two firms, and as an exception ONOFF has lower prices than El-Giganten.

ONOFF’s price is 21.7 percent lower than the price of El-Giganten.15 This figure shows

that El-Giganten can maximize its profits when they are paid the posted price by the

uninformed consumer, which think that a LPG is a credible low-price signal, and at the

same time they can compete with ONOFF, over the informed consumers which are

willing to activate the LPG. The LPG offered by El-Giganten give them the opportunity

to price-discriminate and at the same time it could facilitate tacit collusion, since they

can maintain a high price when waiting for the other firm to follow. If ONOFF would

increase their price identical to the price of El-Giganten, it would have been an obvious

sign of tacit collusion. ONOFF do not seem to act on their incentives to increase their

price, this makes their use of a LPG to a credible low-price signal for this product.

13 14990-13890=1100 1100/14990=0.073 =7.3% 14 14990-13489=1501 1501/14990=0.100 =10% 15 3190-2499=691 691/3190=0.217 =21.7%

23

Figure 4.5. Price Development of a Microsoft XBOX360

Figure 4.6 shows price-data on a vacuum cleaner, Electrolux Ultra Silencer ZUS3366.

In the figure the price of El-Giganten is missing, they did not have the good in their

assortment. However the prices of Siba and Expert which are not offering a LPG are

cooperated and lower than ONOFF’s prices. In week five their price is 13.1 percent

lower than ONOFF’s price.16 The fact that ONOFF is offering higher prices than the

firms which do not offer a LPG seems to be an obvious sign of price discrimination. In

this case ONOFF can maximize its profits when they are paid a higher price from the

uninformed consumer than the price paid by the informed consumer, since they because

of their LPG do not lose their share of informed consumers. Siba and Expert have

incentives to increase their prices towards the price-level of ONOFF, in this way the

firms could cooperate for higher profits. This figure therefore shows that as long as Siba

and Expert do not increase their prices, the only effect which comes of the LPG is price

discrimination.

16 1639-1425=214 214/1639=0.131 =13.1%

24

Figure 4.6. Price Development of an Electrolux Ultra Silencer ZUS3366

The price-data in figure 4.7 is of a MP3 player, Apple IPOD Classic 80GB Silver. The

figure shows that the price of Siba in week one is 12.4 percent lower than the price of

the other firms.17 In the last week El-Giganten is instead the lowest priced firm and Siba

the highest, the difference between the lowest and the highest price is 14 percent.18

Furthermore the figure shows that during the first week Siba is correcting its price

towards a collusive price-level. This could count as an effect of the LPG, that it

facilitates tacit collusion, due to Siba’s lost incentives to undercut the prices of El-

Giganten and ONOFF. El-Giganten on the other hand is decreasing their price so that

their price is lower than the price of all other firms; their strategy is most probably to be

a low-price signal. The other firms follow the change in week four and are as well

lowering their prices towards the price of El-Giganten. This figure shows both pro- and

anti competitive features, at first high and collusive prices that are then decreased in a

partly coordinated and pro competitive way. Since ONOFF still does not have the

lowest prices they are able to price-discriminate due to their LPG.

17 2295-2011=284 284/2295=0.124 =12.4% 18 2290-1969=321 321/2290=0.140 =14%

25

Figure 4.7. Price Development of an Apple Ipod Classic Silver

Figure 4.8 show price-data on a digital compact camera, Canon Digital IXUS 80 IS. The

price-level in the figure is initial almost identical for all firms. In the last week El-

Giganten has decreased its price so that their price is 8.4 percent lower than the price of

the highest priced firm, ONOFF.19 The figure exhibit high collusive prices at first. El-

Giganten then undercut the prices of their rivals so that their price is the lowest

available in the market. When El-Giganten is decreasing its price Siba and Expert

follow the change, while ONOFF has the highest price and do not correct their price

towards a collusive level. There are signs of all three theories in this Figure; at first high

collusive prices, secondly, a low-price signal because of El-Giganten’s action to

decrease its price. And third, ONOFF has the highest price which indicates that their

strategic use of a LPG is as a device to facilitate price discrimination.

Figure 4.8. Price Development of a Canon Digital IXUS 80 IS

19 2390-2190=200 200/2390=0.084 =8.4%

26

Figure 4.9 shows price-data of a digital system camera, Canon EOS 450D. In week five

the difference in price between the lowest priced firm, El-Giganten and the highest

priced firm, ONOFF is 3.9 percent.20 Siba and Expert have close to identical prices as

the price of ONOFF. The prices in the figure seem to be cooperated. El-Giganten has a

lower price than the other firms. All other firms are correcting their price towards the

price-level of El-Giganten. However El-Giganten still has the lowest price which

indicates that their LPG seems to be a signal of low-price. Although the prices are

coordinated it is not in an anti competitive manner, instead this figure show pro

competitive features since the firms are lowering their prices. The only anti competitive

sign in this figure is that the LPG gives ONOFF the possibility to price discriminate

since their price is the highest in week five.

Figure 4.9. Price Development of a Canon EOS 450D 18-55 IS

The price-data in figure 4.10 is as well of a digital compact camera, Canon EOS 400D.

The price of El-Giganten in week one is 14.6 percent lower than the price of the highest

priced firm, Expert.21 In week five the difference is only 7.4 percent.22 The figure

indicates cooperative prices. In the first week El-Giganten has the lowest price, ONOFF

and Siba have a slightly higher price while Expert has a much higher price. If the

strategic use of a LPG would have been that it facilitates tacit collusion, the firms which

offered a LPG would have a golden opportunity to increase its price to the price-level of

Expert. If they did, Siba's incentives to maintain their low price would disappear and

they would have increased its price as well. In week five it is shown that this was not

20 7795-7490=305 305/7795=0.039 =3.9% 21 6429-5490=939 939/6429=0.146 =14.6% 22 5929-5490=439 439/5929=0.074 =7.4%

27

the case instead the price of ONOFF is decreased towards the price-level of all other

firms.

Figure 4.10. Price Development of a Canon EOS 400D + 18-55/3,5-5

The pattern which is most clear when observing the time-series for all products is that

El-Giganten has either the lowest prices available, or is correcting their prices towards

the lowest prices in the market. In other words they are lowering its prices when other

firms’ prices are close to, or below, theirs. In two observations El-Giganten do not have

the product in question (Figure 4.4 and Figure 4.6), and in one observation their price is

the highest. In the other seven observations, El-Giganten seems to be the price leader

and the firm with the lowest price in this market. Since they have adopted a LPG their

strategy seems to be an action taken by the firm to signal their already low prices to the

consumers.

If the prices between the two firms which offer a LPG, El-Giganten and ONOFF, differ,

as they do in most of the figures above it would indicate that at least one firm, the

highest priced firm, could use the LPG as a price-discriminating device. El-Giganten is

in a position where they are able to price-discriminate in only one occasion, for all their

other products they actually have the lowest price. ONOFF on the other hand offers the

lowest price in only two occasions, figure 4.3 where they have the lowest price and 4.5

where all firms have identical prices. In all other figures ONOFF offer a higher price

than at least one of the competitors. This would indicate that parts of ONOFF’s strategic

use of the LPG are for them to be able to price-discriminate and maximize its profits.

Figure 4.7 shows an obvious sign of collusive behavior when Siba is increasing its price

to a collusive level. Their increase in price could demonstrate how a LPG can facilitate

28

tacit collusion. Siba does not have an incentive to maintain a lower price than the other

firms since they know that both El-Giganten and ONOFF will immediately match their

price when their LPG is activated. Instead, Siba’s most profitable strategy and incentive

would be to increase its price to the same price-level as El-Giganten and ONOFF.

Figure 4.2, 4.9 and 4.10 exhibits how ONOFF is increasing its price towards the price-

level of the firms not offering a LPG. This can as well show how the LPG can work as a

device to facilitate tacit collusion and price discrimination. Although ONOFF increased

their price, they can still compete with El-Giganten for both the informed and the

uniformed consumers. At the same time, they can wait and see if El-Giganten will as

well increase its price to the collusive price-level. In these observations El-Giganten did

not follow the increase in price at a single occasion. Although the LPG can facilitate

tacit collusion it is not sure that the strategy of all firms is to cooperate. Instead as in this

case, El-Giganten wants to maintain their strategic use of the LPG as a credible low-

price signal. For these reasons it seems like the LPG works both in a pro and an anti

competitive way; as a credible low-price signal for El-Giganten and for ONOFF as a

device to facilitate price discrimination.

Another observation which is remarkable is that not on a single product has the lowest

posted prices increased over the five week period in which they were examined. This

could be an outcome of El-Giganten’s use of the LPG as a credible low-price signal.

Since they decreased their prices with the purpose to maintain the lowest prices in the

market, it led to a general decrease in price during these weeks. Although it should be

mentioned that some of the decrease in price could be a result of the nature of these

products, i.e., due to the rapid innovation of electronic products prices often decreases

rapidly.

29

4.3.2 Cross-sectional Data

Figure 4.11 presents prices collected at one occasion for nine of the ten products from

the first dataset with an addition of eleven products, a total of twenty products.23 In

other words this dataset is an expansion of the first one and since the prices is collected

at only one occasion only the price-level between the firms can be analyzed.

Figure 4.11 Cross-sectional Data of Twenty Products

Table 4.2 shows a summary from figure 4.11 of which firm has the lowest price and

which has the highest price for all the twenty different products. The most eye caching

observation from table 4.2 is that El-Giganten, which offers a LPG, has the lowest price

in as much as 60 percent of the observations. This is a remark which shows that El-

Giganten’s prices is in most cases the lowest available in this market. This result

indicates that El-Giganten uses their LPG as a credible low-price signal. ONOFF on the

other hand is the firm, together with Siba, which offers the highest price in most cases.

23 The reason to why there are only nine of the ten products from the first dataset included in the second

dataset is because all firms except Siba removed one product, Samsung LE40F86BD, from their

assortment.

30

These two firms are as well the firms which offer the lowest price in fewest occasions.

Since ONOFF indeed do not offer the lowest prices, their LPG seems to be used as a

device to facilitate price discrimination.

Table 4.2 Price-level Conclusions Regarding the Static Analysis

Lowest

Price

Highest

Price

Number of

Products

Lowest Price in

%

Highest Price in

%

El-Giganten 12 4 20 60.0 20.0

ONOFF 4 6 20 20.0 30.0

Siba 4 6 20 20.0 30.0

Expert 5 4 20 25.0 20.0

* The lowest price is shared of firms in some of the observations; this is why lowest price in % adds

to125%.

The fact that Siba and Expert have the lowest price in some of the observations could

count as a sign of price discrimination. If the firms which do not offer a LPG have

prices lower than the firms which offer a LPG, it implies that El-Giganten and ONOFF

could be using the LPG as a tool to price-discriminate between informed and

uninformed consumers. Furthermore, this situation can lead to an increase in price of

Siba and Expert, due to the tacit collusion-facilitating criteria of the LPG. Siba and

Expert do not have an incentive to maintain a lower price than the firms offering a LPG.

4.4 Summary of Results

For the LPG to work as a low-price signal for both firms, which offer one, the prices for

these two firms should be close to identical and the lowest available in the market.

However, the results show that ONOFF has higher prices than El-Giganten in most

cases. El-Giganten is the firm which actually does offer the lowest prices available for

most products. They seem to be the price leader and the lowest priced firm in this

market. If they notice that they are more expensive than another firm, the observations

in the time-series shows signs of them lowering their prices with the purpose to

maintain the markets lowest price. Their LPG seems therefore to be used as a credible

low-price signal. This is the main result from this study. This would strengthen the

conclusion that the LPG is pro competitive instead of anti competitive, which most of

the earlier studies suggests.

31

That ONOFF offers a LPG although they are not the firm with the lowest prices in this

market is a result that contributes to the LPG as anti competitive. This study suggests

that the LPG offered by ONOFF is a device to facilitate price discrimination between

informed and uninformed consumers. The assumption of the two groups of consumers

is crucial for this result to hold. There is not enough evidence which can support that the

effect of the LPG is tacit collusion. For sure, it facilitates tacit collusion since the LPG

can change firm’s incentives. This study does however not show any strong indications

of that firms act on their changed incentives.

32

CHAPTER 5

CONCLUSIONS

Although conventional knowledge tends to support the idea that the effects of LPG’s are

pro competitive, there are a lot of studies on the subject that suggest that the effects are

anti competitive. There exists numerous theoretical studies on this subject, but the

empirical works are scarce and far from conclusive. There is a need to compare firms

which offer a LPG with firms that do not. Therefore, this thesis will investigate what the

effects are on the posted prices of four firms on the Swedish electronics market. Two

firms have adopted a LPG while two have not. This is done in order to answer the main

questions in this study. Do firms with a LPG have higher or lower prices than firms

without a LPG, and are prices colluded in some fashion? In other words, is the LPG

offered pro or anti competitive?

This thesis cannot contribute with any conclusive results; instead it will suggest that the

LPG offered by the two firms in this market is both pro and anti competitive. The

results of the LPG offered by El-Giganten shows pro competitive features while the

LPG offered by ONOFF seems to be used for anti competitive reasons. On the one

hand, El-Giganten is the firm which in most observations actually offers the lowest

posted price, and the time-series data show that they also decrease their price in order to

maintain or claim the lowest price. The effect of their LPG therefore seems to be a

credible low-price signal. ONOFF on the other hand offer the lowest price in least

observations and in some cases they have higher prices than firms which do not offer a

LPG. Every time the price of ONOFF is higher than the lowest price available, their

LPG can be activated. The activation would indicate that the effect of their LPG is

price-discriminating. However it should be mentioned that this is not valid for all

products. There are exceptions where the relationship between these two firms is the

opposite24. Furthermore, the assumption that there exist both informed and uniformed

24 One exception e.g. is the product, Microsoft XBOX 360, in figure 4.5.

33

consumers in the electronics market is crucial for the conclusions regarding the price-

discriminating theory in this thesis.

Prices in this study show some signs of cooperation; however, firms do not seem to

cooperate for higher joint profits. Instead the prices in the data are decreasing over time.

The prices of ONOFF, Siba and Expert move towards the price of El-Giganten and

since their LPG seems to be used as a credible low-price signal, meaning that they have

both the lowest prices and are decreasing its prices in order to uphold the lowest price,

this is definitely a pro competitive feature. Although it should be mentioned that some

of the decrease in price could be a result of the nature of these products, i.e., due to the

rapid innovation of electronic products prices often decrease rapidly.

Since the data was collected under such a short period of time and the number of

products where limited it would be interesting to follow up this thesis with a new study

which would hold expanded price-data. Another important issue would be to look at the

activation of the LPG’s, do the consumer revenues from activating the guarantee offset

the transactions costs related to the LPG? More precisely, do consumers have incentives

to activate a LPG and are the LPG’s activated in the Swedish electronics market?

34

REFERENCES

Arbatskaya, M., Hviid, M. and Shaffer, G, (2004). On the incidence and variety of low-

price guarantees. Journal of Law & Economics, Vol. 47 No 1, p. 307-332.

Arbatskaya, M., M. Hviid, and G. Shaffer, (1999). Promises to Match or Beat the

Competition: Evidence from Retail Tire Prices, In: Advances in applied

microeconomics. 8th Edition, p. 123-138, JAI Press Inc

Carlton, D and Perloff. J, (2005). Modern Industrial Organization, 4th Edition, Pearson

Addison Wesley.

Corts, K.S, (1996). On the Competitive Effects of Price-Matching Policies,

International Journal of Industrial Organization, Vol. 15, p. 283-299.

Elgiganten, (2008). http://www.elgiganten.se/ (Spring, 2008)

Edlin, A.S, (1997). Do Guaranteed-Low-Price Policies Guarantee High Prices, and Can

Antitrust Rise to the Challenge? Harvard Law Review, Vol. 111, p. 528-575.

Edlin, A. and E.Emch, (1999). The Welfare Losses from Price-Matching Policies,

Journal of Industrial Economics, Vol. 47, p. 145-167.

Expert, (2008). http://www.expert.se/ (Spring, 2008)

Hess, J.D. and E. Gerstner, (1991). Price-matching Policies: An Empirical Case,

Managerial and Decision Economics, Vol. 12, p. 305-315.

Hviid, M. and G. Shaffer, (1999). Hassle Costs: The Achilles Heel of Price-Matching

Guarantees, Journal of Economics and Management Strategy Vol. 8, p. 489-522.

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Jain, S. and J. Srivastava, (2000). An Experimental and Theoretical Analysis of Price-

Matching Refund Policies, Journal of Marketing Research Vol. 37, No.3, p. 351-362.

Maňez, J, (2006). Unbeatable Value Low-Price Guarantee: Collusive Mechanism or

Advertising Strategy?, Journal of Economics and Management Strategy Vol 15, no.1, p.

143-166.

Market Court, (2008). http://www.marknadsdomstolen.se/ (2008-04-19)

Moorthy, S. and A.R. Winter. (2006). Price Matching Guarantees, RAND Journal of

Economics, Vol.37 No. 2, p. 449-465.

Onoff, (2008). http://www.onoff.se/ (Spring, 2008)

Perloff. J, (2004). Microeconomics, 3rd Edition, Pearson Addison Wesley.

Salop, S, (1986). Practices that (Credibly) Facilitate Oligopoly Coordination, in

J.Stiglitz and F. Mathewson, eds., New Developments in the Analysis of Market

Structure, The MIT Press Cambridge, MA

Siba, (2008). http://www.siba.se/ (Spring, 2008)

Srivastava, J. and Lurie. N, (2001). A Consumer Perspective on Price-Matching Refund

Policies: Effect on Price Perceptions and Search Behavior, Journal of Consumer

Research Vol. 28, p. 296-307.

Stigler, G, (1964). A Theory of Oligopoly, Journal of Political Economy Vol. 72 No. 1,

p. 44-61.

APPENDIX

Table A1. Category and Models of the Products Included in the Cross-sectional

Dataset

Category Model

Mobil phone Sony Ericsson W890i

Mobil phone LG KU990 Viewty Mobil phone Nokia 5310 Xpress Music TV Panasonic TH-42PX80E

TV LG 32" LCD-TV 32LB75

DVD Sony Blu-ray spelare BDP-S300 B

TV game (console) Microsoft XBOX360 Premium

TV game accessories Xbox 360 Trådlös handkontroll

Vacuum cleaner Electrolux Ultra Silencer ZUS3366

MP3 Apple Ipod Touch 16GB

MP3 Apple IPod Classic 80GB Silver

Compact camera Canon Digital IXUS 80 IS

Compact camera OLYMPUS Digitalkamera MY840

Compact camera Nikon digitalkamera S210

System camera Canon EOS 450D 18-55 IS

System camera Canon EOS 400D + 18-55/3,5–5,6

Hemmabiopaket Sony DAV-IS10

Hemmabiopaket Philips HTS6600

Webcam CREATIVE Webcam Live Cam Optia

Portable DVD Philips PET 830

Table A2. Prices in the Cross-sectional Dataset

Model El-Giganten ONOFF Siba Expert

Sony Ericsson W890i 3149 3390 3490 3590

LG KU990 Viewty 3579 3835 3890 3789

Nokia 5310 Xpress Music 1779 2107 2190 1999

Panasonic TH-42PX80E 9690 9788 9736 9699

LG 32" LCD-TV 32LB75 6990 6790 X 6690

Sony Blu-ray spelare BDP-S300 B 3990 2890 3490 2790

Microsoft XBOX360 Premium 3190 2499 X X

Xbox 360 Trådlös handkontroll 499 395 394 X

Electrolux Ultra Silencer ZUS3366 X 1639 1424 1425

Apple Ipod Touch 16GB 2990 X 3290 2990

Apple Ipod Classic 80GB Silver 1979 2169 2290 2159

Canon Digital IXUS 80 IS 2190 2 390 2289 2289

Canon EOS 450D 18-55 IS 7490 7795 7490 7749

Canon EOS 400D + 18-55/3,5-5,6 5490 5765 5765 5929

OLYMPUS Digitalkamera MY840 1829 1990 1838 1819

Nikon digitalkamera S210 X 1390 1490 1429

Sony DAVIS10 5490 6290 5990 6279

Philips HTS6600 4990 4969 4990 5259

CREATIVE Webcam Live Cam

Optia

379 495 380 529

Philips PET 830 1990 X 2590 X

Table A3. Prices in the Time-series Dataset

Sony Ericsson W890i El-Giganten ONOFF Siba Expert

Week 1 3249 3790 3790 3790

Week 2 3229 3495 3790 3790

Week 3 3159 3495 3790 3690

Week 4 3159 3390 3690 3590

Week 5 3129 3390 3490 3590

Table A4. Prices in the Time-series Dataset

LG KU990 Viewty El-Giganten ONOFF Siba Expert

Week 1 3695 3990 4490 3990

Week 2 3695 3990 3890 3990

Week 3 3589 3790 3890 3990

Week 4 3579 3790 3890 3990

Week 5 3569 3875 3890 3990

Table A5. Prices in the Time-series Dataset

Panasonic TH-42PX80E El-Giganten ONOFF Siba Expert

Week 1 9990 9995 9990 12490

Week 2 9979 9990 9970 X

Week 3 9890 11890 11890 X

Week 4 9890 9890 9790 9890

Week 5 9789 9890 9789 9789

Table A6. Prices in the Time-series Dataset

Samsung LE-40F86BD El-Giganten ONOFF Siba Expert

Week 1 13990 14990 14990 X

Week 2 X 13890 14990 X

Week 3 X X 14990 X

Week 4 X X 14990 X

Week 5 X X 13489 X

Table A7. Prices in the Time-series Dataset

Microsoft XBOX360 El-Giganten ONOFF Siba Expert

Week 1 3190 2499 X X

Week 2 3190 2495 X X

Week 3 3190 2495 X X

Week 4 3190 2495 X X

Week 5 3190 2499 X X

Table A8. Prices in the Time-series Dataset

Electrolux Ultra Silencer ZUS3366 El-Giganten ONOFF Siba Expert

Week 1 X 1639 1488 1489

Week 2 X 1639 1488 1489

Week 3 X 1639 1488 1489

Week 4 X 1639 1489 1429

Week 5 X 1639 1428 1425

Table A9. Prices in the Time-series Dataset

Apple Ipod Classic 80GB Silver El-Giganten ONOFF Siba Expert

Week 1 2289 2295 2011 2289

Week 2 2279 2295 2290 2289

Week 3 2179 2390 2290 2289

Week 4 1990 2169 2290 2289

Week 5 1969 2169 2290 2159

Table A10. Prices in the Time-series Dataset

Canon Digital IXUS 80 IS El-Giganten ONOFF Siba Expert

Week 1 2379 2390 X 2390

Week 2 2379 2390 X 2329

Week 3 2190 2390 2328 2329

Week 4 2190 2390 2389 2390

Week 5 2190 2390 2289 2327

Table A11. Prices in the Time-series Dataset

Canon EOS 450D 18-55 IS El-Giganten ONOFF Siba Expert

Week 1 7590 7995 7990 7990

Week 2 7490 7495 7990 7990

Week 3 7490 7795 7989 7990

Week 4 7490 7795 7794 7749

Week 5 7490 7795 7748 7749

Table A12. Prices in the Time-series Dataset

Canon EOS 400D + 18-55/3,5-5,6 El-Giganten ONOFF Siba Expert

Week 1 5490 5689 5765 6429

Week 2 5490 5689 5765 6429

Week 3 5490 5765 5765 6399

Week 4 5490 5765 5765 6399

Week 5 5490 5765 5765 5929

Week 1, 24 April

Week 2, 1 May

Week 3, 8 May

Week 4, 15 May

Week 5, 22 May