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A Rationale for Repealing the 1987 Groceries Order

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Author Info

  • Patrick Paul Walsh

    (Trinity College Dublin and Katholeike Universteit Leuven)

  • Ciara Whelan

    (London School of Economics and Katholeike Universteit Leuven)

Abstract

A ban on pricing below cost was implemented under the 1987 Groceries Order based on the premise that loss leading used in multi-product retail pricing distorts competition and exploits consumers in the short run, while driving a more concentrated structure and reducing welfare in the long run. Loss leading is examined for multi-product retailers selling in imperfectly competitive market niches with imperfect consumer information. We develop a theoretical argument in a simple two-stage framework that illustrates how loss leading on a subset of products is an equilibrium outcome of price competition that leaves overall welfare equal to that observed under laissez faire.

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File URL: http://www.esr.ie/vol30_1/4_Walsh.pdf
File Function: First version, 1999
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Bibliographic Info

Article provided by Economic and Social Studies in its journal Economic and Social Review.

Volume (Year): 30 (1999)
Issue (Month): 1 ()
Pages: 71-90

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Handle: RePEc:eso:journl:v:30:y:1999:i:1:p:71-90

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Web page: http://www.esr.ie

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References

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  1. Shepard, Andrea, 1991. "Price Discrimination and Retail Configuration," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 30-53, February.
  2. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-83, August.
  3. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn.
  4. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  5. Severin Borenstein, 1991. "Selling Costs and Switching Costs: Explaining Retail Gasoline Margins," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 354-369, Autumn.
  6. Bliss, Christopher, 1988. "A Theory of Retail Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 375-91, June.
  7. Katz, Michael L, 1984. "Price Discrimination and Monopolistic Competition," Econometrica, Econometric Society, vol. 52(6), pages 1453-71, November.
  8. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-50, March.
  9. Giulietti, M., 1995. "Multiproduct Firms' Pricing Behavior in the Italian Grocery Trade," Discussion Papers 9509, Exeter University, Department of Economics.
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Cited by:
  1. Patrick Paul Walsh & Ciara Whelan, 2001. "Product Differentiation and Firm Size Distribution - An Application to Carbonated Soft Drinks," Working Papers 200113, School Of Economics, University College Dublin.
  2. Patrick Paul Walsh & Ciara Whelan, 2002. "Portfolio Effects and Firm Size Distribution - Carbonated Soft Drinks," The Economic and Social Review, Economic and Social Studies, vol. 33(1), pages 43-54.

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