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Lowest Price Guarantees: Consumer's Friend or Foe?

Danielle Amor

16 October 2012
The UK competition authority, the Office of Fair Trading (OFT), has commissioned a report dealing with "across-sellers agreements" called "Can 'Fair' Prices be Unfair?". The report suggests these types of agreements may have a 'softening' effect on competition.

Across-sellers agreements are more commonly known as lowest price or price match guarantees, and the majority of shoppers think these promises to match, or in some cases beat, competitors' prices are a very good idea. Perhaps because of their popularity with customers, these across-sellers agreements, and the often extensive advertising publicising them, have flourished in recent years. Some retailers even provide online tools helping customers to calculate what their shop would have cost at a rival store or website, allowing them to claim on the price match guarantee.

However, the OFT believes the possible anti-competitive effects of these agreements deserve consideration. After all, they do result in a significant deviation from the competitive ideal, in which each retailer sets its price independently. The report also highlights the following specific concerns about across-seller agreements:

  • they discourage retailers from lowering prices, as a retailer will not gain any competitive advantage by reducing prices if its competitors immediately match the reductions;
  • they prevent a potential market entrant, or a small competitor, from offering lower prices to tempt customers away from the larger existing firms;
  • they provide a focal point for price collusion between competitors, even if there is no explicit agreement between the competitors to fix prices, because they provide useful information on other competitors' prices; and
  • "easily impressed" consumers may think a retailer would only give such a guarantee if prices were not significantly lower elsewhere and so be less inclined to shop around, reducing the downward pressure on prices.

That said, the report is not entirely damning. It also notes that across-sellers agreements may have positive effects in some scenarios, by encouraging shoppers to search for cheaper prices, and by incentivising stores to price aggressively in order to attract these price-sensitive customers.

Conclusion

Consumer-facing businesses need to be aware when they are developing these advertising strategies that it is not just the consumers who are paying attention, but the competition authorities as well. The OFT has not yet taken any action in relation to such strategies, but having spent money commissioning this report, it may now be on the lookout for practices that merit investigation (especially if they use online tools to supplement them). A technology or telecoms market with a small number of large competitors who can use these strategies to facilitate tacit price collusion, or with a single major incumbent firm who uses these strategies and therefore discourages new entrants, would perhaps make an appealing target for such an OFT investigation.

Danielle Amor

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