The “COST” of offering price-matching refund policies: A contingent claims perspective

Abstract

Price-matching refunds are frequently used by sellers as part of their overall pricing strategy. While previous research on price-matching refunds has focused on providing a rationale for its existence, our focus is on the financial aspect of such pricing policies. In particular, we contend that a price-matching refund offer is a contingent liability undertaken by sellers. As such, this liability, contingent on whether buyers identify a lower price and claim the refund, has financial value. This contingent-claims perspective enables us to draw on the option pricing literature to analyze price-matching refund offers and identify the key parameters that determine the value of a refund “put” option. The option pricing model provides insights regarding the optimal design of price-matching policies. Importantly, this perspective enables us to numerically compare the costs of offering a price-matching refund policy to alternative pricing strategies. Further, the contingent-claims perspective allows us to represent the existing rationales for price-matching matching refund policies in a parsimonious framework

Citation

Mazumdar, S.C. and Srivastava, J. (2001), "The “COST” of offering price-matching refund policies: A contingent claims perspective", Research in Finance (Research in Finance, Vol. 18), Emerald Group Publishing Limited, Leeds, pp. 133-151. https://doi.org/10.1016/S0196-3821(01)18005-6