1. March 25, 2006Teck H. Ho I. Economic and Behavioral Foundations of Pricing II. Innovative Pricing Concepts and Tools III. Internet Pricing Models Lowest-Price Guarantee

2. March 25, 2006Teck H. Ho Overview of Experiment  2 Markets, B and M  Each Market lasts for 12 rounds  Each group plays 2 times in Market B and 2 times in Market M  Each group is matched with another group only once  Each market has two firms competing  The key difference is that the 2 firms in Market M offer lowest-price guarantees and the 2 firms in Market B do not offer such guarantees

3. March 25, 2006Teck H. Ho Market B: How Prices Determine Profits

4. March 25, 2006Teck H. Ho Market M: How Prices Determine Profits

5. March 25, 2006Teck H. Ho Deciding the Winner Each group’s total earnings is the sum of its earnings in all decision rounds The group who has the highest total earnings will win a prize of $40 (Ho & Ho Foundation) + $5 / Group = $100

6. March 25, 2006Teck H. Ho Simple Rules to Follow  In each decision round, you will be given 4 minutes to make your decision--a prompt will appear when the time limit expires  Do not click on the BACK button on the browser to return to a previous page--make sure the value you entered in the decision box is correct before clicking on the CONTINUE button.  Clicking on the BACK button to enter a new value will not work and may cause the system to behave erratically

7. March 25, 2006Teck H. Ho URL Link:  If you are an observer, clicking on the CONTINUE button right away http://128.32.67.154/pricematching/

8. March 25, 2006Teck H. Ho Three Potential Goals of Lowest-Price Guarantee  Protect market share (and customer margin from complementary products!)  Reduce or postpone price search  Reduce price competition (  higher prices)

9. March 25, 2006Teck H. Ho Ho’s Diagram: Market B (without lowest price guarantee) Contribution (a) Contribution Before Price Change Variable costs (b) Sales Volume Contribution After Price Change Sales Volume Sales Volume ?? Variable costs (b) Unaffected Contribution (a) Additional Variable Costs (e) Contribution Lost Due to Price (c) Contribution Gained Due to Volume (f) CM1 P1 VC P2 S1 2

10. March 25, 2006Teck H. Ho Ho’s Diagram: Market M (with lowest price guarantee) Contribution (a) Contribution Before Price Change Variable costs (b) Sales Volume Contribution After Price Change Sales Volume Sales Volume ?? Variable costs (b) Unaffected Contribution (a) Additional Variable Costs (e) Contribution Lost Due to Price (c) Contribution Gained Due to Volume (f) CM1 P1 VC P2 S1 X 2

11. March 25, 2006Teck H. Ho Predictions by Game Theory “A Theory of Lowest Price Guarantees” by Teck Ho and Noah Lim, 2006