Guaranteed Price Matching
To eliminate the incentive for underpricing, one firm can guarantee that it will match its competitor’s price.
- How will Jack respond to Jill’s price-matching policy?
- Choose the high price: Jack matches Jill’s high price in which case both will earn maximum (cartel) profits.
- Choose the low price: if Jack chooses the low price, Jill will match the low price and both firms will earn minimum (duopoly) profits. Therefore, Jack has no reason to choose the low price.