‘Brand Match’ may look appealing, but end up robbing customers of the ability to pit retailers against one another

Andrew Sylvester

 

Pink n Pay’s recent competitive strategy called “Brand Match” may be as anticompetitive as an explicit cartel. While this may not be their intention, the road to the Competition Tribunal is paved with the claim of no anticompetitive effects.

Brand Match is a system which compares Pick n Pay’s shelf prices on over a thousand major products with those of each of their 4 major competitors on a weekly basis. If a customer buys 10 items or more, and at least 1 item is on the Brand Match list of products, then they will receive a coupon for any difference should the Pick n Pay price be higher than any of their competitors.

A first impression of this strategy is that it is aggressive competition which will benefit customers directly through lower prices. But predatory pricing by a dominant firm is also aggressive competition which benefits customers through lower prices, at least during the predatory phase. Once the strategy achieves its goals, the dominant firm increases prices and customers suffer through a sustained lack of competition. A good understanding of the likely competitive outcomes thus often requires predicting the future to some degree. Now Pick n Pay may not be a dominant firm, and Brand Match is unlikely to result in predation of any kind, but we need to understand the long term influence of this strategy on competitive dynamics in order to understand whether it will benefit or harm consumers.

Firms don’t ordinarily like dropping prices. They will typically only do so either as a reaction to a competitor who has dropped prices, or if they believe that the profit they will gain from new customers will outweigh the lost profits from the lower price to existing customers. The more quickly a competitor becomes aware of the price drop, and reacts to it, the fewer new customers you will gain and the less likely the original firm will be to drop prices.

Pick n Pay’s Brand Match strategy ingeniously overcomes the information problem usually associated with getting prices right, while at the same time sends a clear signal to its competitors as to what will happen if they try to undercut Pick n Pay. The information lag is overcome by commissioning an independent company to check competitors’ prices every week. Where a competitor has a lower price, Pick n Pay’s branch network does not need to actively react because their system will effectively reduce the shelf prices by reimbursing customers with a coupon.

The core mechanics of the Brand Match strategy are known by competitors. This means that competitors know that Pick n Pay will very quickly be aware of any price reductions, including specials, and also that Pick n Pay will immediately meet the price reduction. If firms only ever proactively drop prices in order to gain volume at the expense of their competitors, why would any retailer attempt to undercut Pick n Pay’s prices given the Brand Match strategy?

In a nutshell, the Brand Match strategy undermines retailers’ incentives to compete on price and encourages an environment for coordinated market outcomes. If this strategy is successful, it will eventually lead to a situation in which prices may rise but are unlikely to drop. Importantly, this outcome can be achieved without the major retailers sitting down around a table and agreeing on prices. Somewhat ironically, Pick n Pay’s own Brand Match slogan describes well how this strategy has been designed to shift the balance of shopping power away from the consumer: “We shop around, so you don’t have to.”

The Pick n Pay Brand Match campaign does not explicitly set out to establish a cartel in the South African retail market; but the net result could be the same. Consumers are unlikely to look beyond the short-term benefits of this strategy and see the potential long-term harm. The Competition Commission may need to engage with Pick n Pay on this matter before it is too late.