Best-price Guarantees as a Quality Signal

Stephan, Levy (2004): Best-price Guarantees as a Quality Signal.

Abstract

This paper shows that best-price guarantees can enhance welfare, in contrast to findings in recent literature. While a high-quality monopolist can signal its quality strictly through high prices, using both price and a best-price guarantee may allow the firm to signal its quality with a smaller price distortion. A low-quality monopolist will not mimic its high-quality counterpart by offering a best-price guarantee, because the accompanying restrictions are too costly. Best-price guarantees are similar to money-back guarantees and other more general contracts in their ability to allow less costly signaling. The welfare enhancing capabilities of these contracts imply that the antitrust authorities should regard them more favorably.

• Item Type: MPRA Paper
• Language: English
• Keywords: Most favored customer; MFCC; best-price guarantees; signaling; game theory; industrial organization
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality ; Standardization and Compatibility; L - Industrial Organization > L0 - General > L00 - General

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