Price dispersion and loss leaders
AbstractDispersion in retail prices of identical goods is inconsistent with the standard model of price competition among identical firms, which predicts that all prices will be driven down to cost. One common explanation for such dispersion is the use of a loss-leader strategy, in which a firm prices one good below cost in order to attract a higher customer volume for profitable goods. By assuming each consumer is forced to buy all desired goods at a single firm, we create the possibility of an effective loss-leader strategy. We find that such a strategy cannot occur in equilibrium if individual demands are inelastic, or if demands are diversely distributed. We further show that equilibrium loss leaders can occur (and can result in positive profits) if there are demand complementarities, but only with delicate relationships among the preferences of all consumers.
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Bibliographic InfoArticle provided by Econometric Society in its journal Theoretical Economics.
Volume (Year): 3 (2008)
Issue (Month): 4 (December)
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Web page: http://econtheory.org
Price competition; price dispersion; loss leaders;
Find related papers by JEL classification:
- D40 - Microeconomics - - Market Structure and Pricing - - - General
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- Rhodes, Andrew, 2011. "Multiproduct pricing and the Diamond Paradox," MPRA Paper 32511, University Library of Munich, Germany.
- Rey, Patrick & Chen, Zhijun, 2010.
"Loss Leading as an Exploitative Practice,"
IDEI Working Papers
658, Institut d'Économie Industrielle (IDEI), Toulouse, revised Dec 2011.
- Rosato, Antonio, 2013. "Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs," MPRA Paper 47168, University Library of Munich, Germany.
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