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The effects of resale-below-cost laws in the presence of a strategic manufacturer

Author

Listed:
  • Noriaki Matsushima

    (Osaka University)

  • Akira Miyaoka

    (Osaka University)

Abstract

In retail markets, below-cost (or loss-leader) pricing is an important marketing tool to attract customers. However, several countries have adopted resale-below-cost laws that ban retailers from adopting this promotion strategy. In this study, we theoretically investigate how banning below-cost pricing influences equilibrium prices, firms’ profits, and consumer surplus. We explicitly consider not only horizontal competition between retailers but also vertical channel relationships between manufacturers and retailers. In addition, we focus on asymmetric competition between dominant and weak retailers, which have heterogeneous bargaining positions vis-à-vis an upstream manufacturer. We show that this ban induces the manufacturer to reduce its wholesale price and can lead to a decrease in equilibrium retail prices including that of a loss-leader product. We also show that owing to the effects of such price reductions, the ban always improves the total consumer surplus and can benefit the weak retailer in terms of bargaining position, although it always harms the manufacturer and the dominant retailer.

Suggested Citation

  • Noriaki Matsushima & Akira Miyaoka, 2015. "The effects of resale-below-cost laws in the presence of a strategic manufacturer," Quantitative Marketing and Economics (QME), Springer, vol. 13(1), pages 59-91, March.
  • Handle: RePEc:kap:qmktec:v:13:y:2015:i:1:d:10.1007_s11129-015-9154-1
    DOI: 10.1007/s11129-015-9154-1
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    Cited by:

    1. Takeshi Ebina & Noriaki Matsushima, 2017. "Product differentiation and entry timing in a continuous-time spatial competition model with vertical relations," ISER Discussion Paper 1009, Institute of Social and Economic Research, Osaka University.

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    More about this item

    Keywords

    Below-cost pricing; Channel power; Resale-below-cost laws; Vertical relations;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • M38 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Government Policy and Regulation
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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