The price-matching dilemma

We characterize when strategic considerations of stores to match prices set by rivals on branded goods devolve into a prisoner's dilemma. We consider a setting where stores also offer generic products, creating incentives to raise prices for branded goods that compete with generics—to shift consumer purchases toward more profitable generics. Price-matching guarantees commit stores not to set high prices for branded goods, thereby attracting more shoppers. When shopping price-elasticities are sufficiently high, a prisoner's dilemma results.