The Bright Side of Price Guarantee for Retailers in a Decentralized Distribution Channel

ABSTRACT Online retailers usually refund the price difference to consumers after a product price reduction, which is known as price guarantee. This paper delves into the implications of price guarantee within supply chains that integrate one manufacturer, one retailer, and consumers within two sale periods. Employing a game model, we first find that the presence of price guarantee always reduces wholesale prices but first reduces and then improves retail prices from the first sale period to the next period. This dynamic shift proves advantageous for both the manufacturer and the retailer, leading to higher total profits with price guarantee compared to scenarios without such guarantee. This outcome is attributed to the mitigation of the double marginalization effect in the initial period and the subsequent rise in retail prices during the latter period. We observe an initial decrease followed by an increase in profits of the manufacturer and the retailer in response to the degree of price guarantee. Concurrently, the dynamics of consumer surplus exhibit an initial increase, followed by a subsequent decrease with the extent of price guarantee. Our findings suggest that the retailer's optimal level of price guarantee is nonmonotonic with market shrinkage.