A careful study of the retail tire market suggests that low-price guarantees __________ (increase/decrease) prices by about __________ (1, 10, 25, 37) percent.

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Application 2 LOW-PRICE GUARANTEE INCREASES TIRE PRICES APPLYING THE CONCEPTS #2: Do low-price guarantees generate higher or lower prices? LOW PRICE GUARANTEE wanik GUARANTEE We'll Matche Comprice On Current Pr entical Items Any In two successive months (November and December), a Flor- ida tire retailer listed prices for 35 types of tires in newspaper advertisements. In November the average price was $45, and in December the average price was $55. The December advertise- ment was different in another way: it included a low-price guaran- tee under which the retailer agreed to match any lower advertised price (and also pay the customer some percentage of the price gap). In fact, for each of the 35 types of tires, the December price was the same or higher than the November price. In this case, a low-price guarantee generated higher prices. Is the relationship between low-price guarantees and prices apparent or real? A careful study of the retail tire market sug- gests that prices are generally higher in markets where firms offer low-price guarantees. On average, the presence of a low-price guarantee increases prices by $4 per tire, or about 10 percent of the price. Related to Exercises 2.5. SOURCES: Maria Arbatskaya, Morten Hviid, and Greg Shaffer, "Promises to Match or Beat the Competition," Advances in Applied Microeconomics 8 (1999), pp. 123- 138; Aaron S. Edlin, "Do Guaranteed-Low-Price Policies Guarantee High Prices, and Can Antitrust Rise to the Challenge?" 111 Harvard Law Review 528 (1997).