Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Price Protection

What it is:

Price protection is an agreement between a buyer and a seller whereby the parties agree to fix the price of a good or service for a specific period of time.

How it works (Example):

In practice, price protection (sometimes called purchase protection) is a feature of many credit cards, whereby customers can get a refund on purchases made with the credit card if the price of those purchases goes down within a certain time frame after the purchase.

For example, if you purchase an airline ticket to Orlando for $750 on January 1 with a credit card, but then the price falls to $500 on January 23, a price protection guarantee in the credit card contract entitles you to a $250 refund from your credit card company.

Why it Matters:

Price protection is a way to induce sales by easing customers' uncertainty about price changes. As such, price protection is more effective for goods and services whose prices change frequently. Though it is a common component of credit card agreements, it is generally not well-known.