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Price Dispersion and Loss-Leader Pricing: Evidence from the Online Book Industry

Author

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  • Xinxin Li

    (Department of Operations and Information Management, School of Business, University of Connecticut, Storrs, Connecticut 06269)

  • Bin Gu

    (Department of Information Systems, W. P. Carey School of Business, Arizona State University, Tempe, Arizona 85287)

  • Hongju Liu

    (Department of Marketing, School of Business, University of Connecticut, Storrs, Connecticut 06269)

Abstract

In this paper, we develop a theoretical model to analyze the pricing strategies of competing retailers with asymmetric cross-selling capabilities when product demand changes. Our results suggest that retailers with better opportunities for cross-selling have higher incentives to adopt loss-leader pricing on high-demand products than retailers with low cross-selling capabilities. As a result, price dispersion of a product across retailers rises when its demand increases. The predictions of our model are consistent with the empirical evidence from the online book retailing industry. Using product breadth as a proxy for cross-selling capability, we find that retailers with high cross-selling capabilities reduce prices on best sellers more aggressively than retailers with low cross-selling capabilities. As a result, price dispersion increases when a book makes it to the best-seller list, and the increase is mainly driven by the difference in pricing behavior between retailers with different cross-selling capabilities. Our empirical results are robust against a number of alternative explanations. This paper was accepted by Sandra Slaughter, information systems.

Suggested Citation

  • Xinxin Li & Bin Gu & Hongju Liu, 2013. "Price Dispersion and Loss-Leader Pricing: Evidence from the Online Book Industry," Management Science, INFORMS, vol. 59(6), pages 1290-1308, June.
    • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:6:p:1290-1308
    DOI: 10.1287/mnsc.1120.1642
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    References listed on IDEAS

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    9. Inderst, Roman & Obradovits, Martin, 2021. "Loss Leading as a Threat to Brands," EconStor Preprints 253667, ZBW - Leibniz Information Centre for Economics.
    10. Leung Tin Cheuk & Tsang Kwok Ping & Tsui Kevin K., 2020. "Why Are Inferior Seats “Underpriced”? Evidence from the English Premier League," Man and the Economy, De Gruyter, vol. 7(1), pages 1-26, June.
    11. Zhang, Juzhi & Xu, Qingyun & He, Yi, 2018. "Omnichannel retail operations with consumer returns and order cancellation," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 118(C), pages 308-324.
    12. Timothy J. Richards & Stephen F. Hamilton & Miguel Gomez & Elliot Rabinovich, 2017. "Retail Intermediation and Local Foods," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(3), pages 637-659.
    13. Inderst, Roman & Obradovits, Martin, 2020. "Why Brand Manufacturers Should Take Loss Leading Seriously," EconStor Preprints 253663, ZBW - Leibniz Information Centre for Economics.
    14. Yongzhao Wang & Xiaojie Sun, 2019. "Dynamic vs. Static Wholesale Pricing Strategies in a Dual-Channel Green Supply Chain," Complexity, Hindawi, vol. 2019, pages 1-14, November.
    15. Luttmann, Alexander & Gaggero, Alberto A, 2022. "How does COVID-19 affect intertemporal price dispersion? Evidence from the airline industry," MPRA Paper 111797, University Library of Munich, Germany.
    16. Kyungmin Choi & Sunghan Ryu & Daegon Cho, 2019. "When a loss becomes a gain: different effects of substitute versus complementary loss leaders in a multi-sided platform," Electronic Markets, Springer;IIM University of St. Gallen, vol. 29(4), pages 681-691, December.
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    18. Yanyan He & Juan Zhang & Qinglong Gou & Gongbing Bi, 2018. "Supply chain decisions with reference quality effect under the O2O environment," Annals of Operations Research, Springer, vol. 268(1), pages 273-292, September.

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