Loss Leading as an Exploitative Practice
AbstractLarge 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by HAL in its series Working Papers with number hal-00540724.
Date of creation: 29 Nov 2010
Date of revision:
Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00540724/en/
Contact details of provider:
Web page: http://hal.archives-ouvertes.fr/
loss leading; exploitative practice; retail power;
Other versions of this item:
- Rey, Patrick & Chen, Zhijun, 2010. "Loss Leading as an Exploitative Practice," TSE Working Papers 10-218, Toulouse School of Economics (TSE), revised Dec 2011.
- Rey, Patrick & Chen, Zhijun, 2010. "Loss Leading as an Exploitative Practice," IDEI Working Papers 658, Institut d'Économie Industrielle (IDEI), Toulouse, revised Dec 2011.
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
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.:
- Inderst, Roman & Wey, Christian, 2007.
"Buyer power and supplier incentives,"
European Economic Review,
Elsevier, vol. 51(3), pages 647-667, April.
- Inderst, Roman & Wey, Christian, 2002. "Buyer Power and Supplier Incentives," CEPR Discussion Papers 3547, C.E.P.R. Discussion Papers.
- Roman Inderst & Christian Wey, 2005. "Buyer Power and Supplier Incentives," Discussion Papers of DIW Berlin 464, DIW Berlin, German Institute for Economic Research.
- Roman Inderst & Christian Wey, 2003. "Buyer Power and Supplier Incentives," CIG Working Papers SP II 2003-05, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
- Claire CHAMBOLLE, 2005.
"Stratégies de revente à perte et réglementation,"
Annales d'Economie et de Statistique,
ENSAE, issue 77, pages 59-79.
- Marie-Laure Allain & Claire Chambolle, 2007.
"Loss leaders banning laws as vertical restraints,"
- 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.
- Chen, Zhiqi, 2003.
" Dominant Retailers and the Countervailing-Power Hypothesis,"
RAND Journal of Economics,
The RAND Corporation, vol. 34(4), pages 612-25, Winter.
- Zhiqi Chen, 2001. "Dominant Retailers and the Countervailing Power Hypothesis," Carleton Economic Papers 01-05, Carleton University, Department of Economics, revised 2003.
- Skidmore, Mark & Peltier, James & Alm, James, 2005. "Do state motor fuel sales-below-cost laws lower prices?," Journal of Urban Economics, Elsevier, vol. 57(1), pages 189-211, January.
- Cleeren, Kathleen & Dekimpe, Marnik G. & Gielens, Katrijn & Verboven, Frank, 2008.
"Intra- and Inter-Format Competition Among Discounters and Supermarkets,"
CEPR Discussion Papers
6964, C.E.P.R. Discussion Papers.
- Kathleen Cleeren & Frank Verboven & Marnik G. Dekimpe & Katrijn Gielens, 2010. "Intra- and Interformat Competition Among Discounters and Supermarkets," Marketing Science, INFORMS, vol. 29(3), pages 456-473, 05-06.
- John Vickers & Mark Armstrong, 2006.
"Competitive Nonlinear Pricing and Bundling,"
Economics Series Working Papers
281, University of Oxford, Department of Economics.
- repec:hrv:faseco:4685158 is not listed on IDEAS
- Paul Dobson & Michael Waterson, 1999. "Retailer power: recent developments and policy implications," Economic Policy, CEPR;CES;MSH, vol. 14(28), pages 133-164, 04.
- Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July.
- Weinstein, Jonathan & Ambrus, Attila, 2008. "Price dispersion and loss leaders," Theoretical Economics, Econometric Society, vol. 3(4), December.
- Patrick Rey & Thibaud Vergé, 2010.
"Resale Price Maintenance And Interlocking Relationships,"
Journal of Industrial Economics,
Wiley Blackwell, vol. 58(4), pages 928-961, December.
- Patrick REY & Thibaud VERGE, 2009. "Resale Price Maintenance and Interlocking Relationships," Working Papers 2009-11, Centre de Recherche en Economie et Statistique.
- Roman Inderst & Tommaso M. Valletti, 2008.
"Buyer Power and the “Waterbed Effect”,"
CEIS Research Paper
107, Tor Vergata University, CEIS, revised 10 Jul 2008.
- Walsh, Patrick Paul & Whelan, Ciara, 1999. "Loss leading and price intervention in multiproduct retailing: welfare outcomes in a second-best world1," International Review of Law and Economics, Elsevier, vol. 19(3), pages 333-347, September.
- T. Randolph Beard & Michael L. Stern, 2008. "CONTINUOUS CROSS SUBSIDIES AND QUANTITY RESTRICTIONS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 56(4), pages 840-861, December.
- Bliss, Christopher, 1988. "A Theory of Retail Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 375-91, June.
- 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.
- Oecd, 2007. "Resale below Cost Laws and Regulations," OECD Journal: Competition Law and Policy, OECD Publishing, vol. 9(1), pages 169-255.
- Weinstein, Jonathan & Ambrus, Attila, 2008. "Price Dispersion and Loss Leaders," Scholarly Articles 4589708, Harvard University Department of Economics.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- âLoss Leading as an Exploitative Practice,â Z. Chen & P. Rey (2012)
by afinetheorem in A Fine Theorem on 2013-07-12 04:27:32
- Rhodes, Andrew, 2011. "Multiproduct pricing and the Diamond Paradox," MPRA Paper 32511, University Library of Munich, Germany.
- Brandão, António & Correia-da-Silva, João & Pinho, Joana, 2014.
"Spatial competition between shopping centers,"
Journal of Mathematical Economics,
Elsevier, vol. 50(C), pages 234-250.
- Chen, Zhijun & Rey, Patrick, 2013.
TSE Working Papers
13-450, Toulouse School of Economics (TSE).
- Rosato, Antonio, 2013. "Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs," MPRA Paper 47168, University Library of Munich, Germany.
- 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.
- Noriaki Matsushima & Akira Miyaoka, 2013. "Who benefits from resale-below-cost laws?," ISER Discussion Paper 0875, Institute of Social and Economic Research, Osaka University.
- Smith, Howard & Thomassen, Øyvind, 2012. "Multi-category demand and supermarket pricing," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 309-314.
- In, Younghwan & Wright, Julian, 2014. "Loss-leader pricing and upgrades," Economics Letters, Elsevier, vol. 122(1), pages 19-22.
- Roig, Guillem, 2014. "Informative Advertisement of Partial Compatible Products," TSE Working Papers 14-483, Toulouse School of Economics (TSE).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).
If references are entirely missing, you can add them using this form.