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Price dispersion and loss leaders

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Author Info

  • 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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Bibliographic Info

Article provided by Econometric Society in its journal Theoretical Economics.

Volume (Year): 3 (2008)
Issue (Month): 4 (December)
Pages:

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Handle: RePEc:the:publsh:362

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Web page: http://econtheory.org

Related research

Keywords: Price competition; price dispersion; loss leaders;

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Cited by:
  1. Zhijun Chen & Patrick Rey, 2010. "Loss Leading as an Exploitative Practice," Working Papers hal-00540724, HAL.
  2. Rhodes, Andrew, 2011. "Multiproduct pricing and the Diamond Paradox," MPRA Paper 32511, University Library of Munich, Germany.

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