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Loss Leading as an Exploitative Practice

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Author Info

  • Zhijun Chen

    (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, Department of Computer Science [Auckland] - The University of Auckland)

  • Patrick Rey

    (Toulouse School of Economics - Toulouse School of Economics)

Abstract

Large retailers, enjoying substantial market power in some local markets, often compete with smaller retailers who carry a narrower range of products in a more efficient way. We find that these large retailers can exercise their market power by adopting a loss-leading pricing strategy, which consists of pricing below cost some of the products also offered by smaller rivals, and raising the prices on the other products. In this way, the large retailers can better discriminate multi-stop shoppers from one-stop shoppers — and may even earn more profit than in the absence of the more efficient rivals. Loss leading thus appears as an exploitative device, designed to extract additional surplus from multi-stop shoppers, rather than as an exclusionary instrument to foreclose the market, although the small rivals are hurt as a by-product of exploitation. We show further that banning below-cost pricing increases consumer surplus, small rivals' profits, and social welfare. Our insights apply generally to industries where a firm, enjoying substantial market power in one segment, competes with more efficient rivals in other segments, and procuring these products from the same supplier generates customer-specific benefits. They also apply to complementary products, such as platforms and applications. There as well, our analysis provides a rationale for below-cost pricing based on exploitation rather than exclusion.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00540724.

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Date of creation: 29 Nov 2010
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Handle: RePEc:hal:wpaper:hal-00540724

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Keywords: loss leading; exploitative practice; retail power;

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References

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  1. Allain Marie-Laure & Chambolle Claire, 2005. "Loss-Leaders Banning Laws as Vertical Restraints," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 3(1), pages 1-25, February.
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  16. Weinstein, Jonathan & Ambrus, Attila, 2008. "Price Dispersion and Loss Leaders," Scholarly Articles 4589708, Harvard University Department of Economics.
  17. Bolton, P. & Brodley, J.F. & Riordan, M.H., 1999. "Predatory Pricing: Strategic Theory and Legal Policy," Discussion Paper 1999-82, Tilburg University, Center for Economic Research.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. “Loss Leading as an Exploitative Practice,” Z. Chen & P. Rey (2012)
    by afinetheorem in A Fine Theorem on 2013-07-12 04:27:32
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Cited by:
  1. In, Younghwan & Wright, Julian, 2014. "Loss-leader pricing and upgrades," Economics Letters, Elsevier, vol. 122(1), pages 19-22.
  2. Roig, Guillem, 2014. "Informative Advertisement of Partial Compatible Products," TSE Working Papers 14-483, Toulouse School of Economics (TSE).
  3. Chen, Zhijun & Rey, Patrick, 2013. "Competitive Cross-Subsidization," IDEI Working Papers 808, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Rhodes, Andrew, 2011. "Multiproduct pricing and the Diamond Paradox," MPRA Paper 32511, University Library of Munich, Germany.
  5. António Brandão & João Correia-da-Silva & Joana Pinho, 2010. "Spatial competition between shopping centers," FEP Working Papers 394, Universidade do Porto, Faculdade de Economia do Porto.
  6. Rosato, Antonio, 2013. "Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs," MPRA Paper 47168, University Library of Munich, Germany.
  7. Johansen, Bjørn Olav, 2012. "The Buyer Power Of Multiproduct Retailers: Competition With One-Stop Shopping," Working Papers in Economics 03/12, University of Bergen, Department of Economics.
  8. Noriaki Matsushima & Akira Miyaoka, 2013. "Who benefits from resale-below-cost laws?," ISER Discussion Paper 0875, Institute of Social and Economic Research, Osaka University.
  9. Smith, Howard & Thomassen, Øyvind, 2012. "Multi-category demand and supermarket pricing," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 309-314.

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