Complementarities, Below-Cost Pricing, and Welfare Losses
AbstractWe 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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Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 788.
Length: 22 p.
Date of creation: 2008
Date of revision:
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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-17 (All new papers)
- NEP-COM-2008-05-17 (Industrial Competition)
- NEP-MIC-2008-05-17 (Microeconomics)
- NEP-NET-2008-05-17 (Network Economics)
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