Weinstein, Jonathan () (Kellogg School of Management, Northwestern University, and School of Social Science, Institute for Advanced Study) Ambrus, Attila () (Department of Economics, Harvard University)
Abstract
Dispersion 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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Article provided by Society for Economic Theory in its journal Theoretical Economics.
Volume (Year): 3 (2008) Issue (Month): 4 (December) Pages: 525-537 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: D40 - Microeconomics - - Market Structure and Pricing - - - General D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection