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Complementarities, Below-Cost Pricing, and Welfare Losses

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Author Info
Vanessa von Schlippenbach
Abstract

We analyze below-cost pricing in retail markets and examine its impact on social welfare as well as on suppliers' incentives to invest in quality. Considering negotiations about a linear wholesale price between the retailer and her suppliers, we find that below-cost pricing aggravates the double marginalization problem and causes welfare losses compared to a regime where below-cost pricing is banned. Furthermore, suppliers have stronger incentives to invest in high quality products if a ban of below-cost pricing is enforced.

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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 788.

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Length: 22 p.
Date of creation: 2008
Date of revision:
Handle: RePEc:diw:diwwpp:dp788

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Related research
Keywords: Complementarities; Retailing; Below-Cost Pricing;

Find related papers by JEL classification:
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bliss, Christopher, 1988. "A Theory of Retail Pricing," Journal of Industrial Economics, Blackwell Publishing, vol. 36(4), pages 375-91, June. [Downloadable!] (restricted)
  2. Bagwell, Kyle, 1987. "Introductory Price as a Signal of Cost in a Model of Repeat Business," Review of Economic Studies, Blackwell Publishing, vol. 54(3), pages 365-84, July. [Downloadable!] (restricted)
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  3. Sobel, Joel, 1984. "The Timing of Sales," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 353-68, July. [Downloadable!] (restricted)
  4. DeGraba, Patrick, 2006. "The loss leader is a turkey: Targeted discounts from multi-product competitors," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 613-628, May. [Downloadable!] (restricted)
  5. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September. [Downloadable!] (restricted)
  6. Salop, Steven, 1977. "The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 393-406, October. [Downloadable!] (restricted)
  7. Marie-Laure Allain ; Claire Chambolle, 2004. "Loss-leaders Banning Laws as Vertical Restraints," Working Papers 2004-19, Centre de Recherche en Economie et Statistique. [Downloadable!]
  8. Salop, S & Stiglitz, J E, 1982. "The Theory of Sales: A Simple Model of Equilibrium Price Dispersion with Identical Agents," American Economic Review, American Economic Association, vol. 72(5), pages 1121-30, December. [Downloadable!] (restricted)
  9. Beggs, Alan W, 1994. "Mergers and Malls," Journal of Industrial Economics, Blackwell Publishing, vol. 42(4), pages 419-28, December. [Downloadable!] (restricted)
  10. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213. [Downloadable!] (restricted)
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