Recognizing that price image is an important determinant of shopping decisions, manufacturers and retailers use a number of strategies to convey their price image. A common tactic is to offer a price-matching (or beating) guarantee that promises to match (or beat) competitors’ lower prices. Such price guarantees are common in a variety of consumer and industrial markets. Price-matching guarantees are unique because, unlike typical price promotions, they do not advertise a price reduction. Further, to claim a refund, consumers often have to incur a hassle cost that may entail engaging in additional price search, providing evidence of lower price, and returning to the store that offered the guarantee.

The main goal of this paper is to examine price-matching guarantees within the context of signaling theory and identify market conditions under which such guarantees are effective and ineffective market signals. Since consumers are often uncertain about overall store prices, this research examines whether the effectiveness of a price-matching guarantee as a signal of low store prices depends on market level factors such as the number of and distance between competitive stores. In examining macro factors, this research explicitly considers the market conditions under which consumers are likely to associate price-matching guarantees with low prices and identifies a possible mechanism where consumers’ reliance on a price-matching policy as a signal of low price is related to their perceptions of how other consumers are likely to behave.

Three studies show that the effectiveness of price-matching guarantees depends on consumer beliefs about the extent to which disciplinary mechanisms operate in the marketplace. For example, the distance between competitive retailers influences consumer beliefs about the extent to which other consumers shop around and enforce guarantees. Results support the signaling theory prediction that a price-matching guarantee is likely to be an effective signal of store prices when the market disciplinary mechanisms are strong because market disciplinary mechanisms increase the cost of sending a false signal. For retailers, this means that price-matching policies are more likely to be effective in markets in which price comparisons are relatively easy.

A survey demonstrates that, when a store offers a price-matching guarantee, the belief that other consumers will enforce guarantees lowers perceptions of store prices. Importantly, the survey also shows that price perceptions are not a function of beliefs about the likelihood of finding the same model in a different store. This means that, in using price-matching guarantees to assess store prices, consumers are not particularly concerned with the possibility that different retailers carry different models of the same product.

Since the survey does not explicitly test the conditions under which a price-matching guarantee is and is not an effective signal of store prices, two experiments are conducted. These experiments extend the findings of the survey by explicitly manipulating perceptions of market disciplinary mechanisms through perceptions of other consumers’ willingness to engage in price search. Consistent with signaling theory, both studies show that price-matching guarantees are effective when search costs are low but not when search costs are high. This means that retailers should account for the ease of price comparison in deciding whether or not to offer price-matching guarantees.

From a managerial perspective, our results suggest that the effectiveness of price-matching policies depend on market conditions. Although characteristics of the buyer, such as opportunity costs of time, and characteristics of the store, such as type of retailer, need to be considered in deciding whether or not to offer a price-matching guarantee, our results suggest that retailers also need to consider the competitive environment before assuming that such guarantees will be effective signals of low price. In markets in which consumers can easily compare prices such as the Internet, or where the distance between competitive retailers is relatively small, price-matching guarantees are likely to lead to lower price perceptions. In such markets, retailers who have the cost structure to offer price-matching guarantees should consider offering such policies to attract price-conscious consumers. In markets in which comparing prices is difficult, such as when the distance between competitive retailers is large or there are few retailers in the market, price-matching policies are unlikely to be effective. Retailers who wish to convey low prices may find it more effective to use alternative mechanisms, such a store atmospherics and comparisons to manufacturer’s suggested retail price, to convince consumers to purchase from them.