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Loss-leader pricing and upgrades

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  • In, Younghwan
  • Wright, Julian
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    Abstract

    A new theory of loss-leader pricing is provided in which firms advertise low (below cost) prices for certain goods to signal that their other unadvertised (substitute) goods are not priced too high. The theory is applied to the pricing of upgrades. The results contrast with most existing loss-leader theories in that firms make a loss on some consumers (who buy the basic version of the good) and a profit on others (who buy the upgrade).

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    Bibliographic Info

    Article provided by Elsevier in its journal Economics Letters.

    Volume (Year): 122 (2014)
    Issue (Month): 1 ()
    Pages: 19-22

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    Handle: RePEc:eee:ecolet:v:122:y:2014:i:1:p:19-22

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    Web page: http://www.elsevier.com/locate/ecolet

    Related research

    Keywords: Signaling; Loss leader; Advertising; Upgrades;

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    1. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July.
    2. James D. Hess & Eitan Gerstner, 1987. "Loss Leader Pricing and Rain Check Policy," Marketing Science, INFORMS, vol. 6(4), pages 358-374.
    3. Zhijun Chen & Patrick Rey, 2010. "Loss Leading as an Exploitative Practice," Working Papers hal-00540724, HAL.
    4. Glenn Ellison, 2005. "A Model of Add-on Pricing," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 585-637, May.
    5. Bagwell, Kyle & Ramey, Garey, 1994. "Advertising and Coordination," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 153-72, January.
    6. Duncan Simester, 1997. "Note. Optimal Promotion Strategies: A Demand-Sided Characterization," Management Science, INFORMS, vol. 43(2), pages 251-256, February.
    7. Rosato, Antonio, 2013. "Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs," MPRA Paper 47168, University Library of Munich, Germany.
    8. DeGraba, Patrick, 2006. "The loss leader is a turkey: Targeted discounts from multi-product competitors," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 613-628, May.
    9. Duncan Simester, 1995. "Signalling Price Image Using Advertised Prices," Marketing Science, INFORMS, vol. 14(2), pages 166-188.
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