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Loss Leading as an Exploitative Practice

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  • Rey, Patrick
  • Chen, Zhijun

Abstract

We show that large retailers, competing with smaller stores that carry a narrower range, can exercise market power by pricing below cost some of the products also offered by the smaller rivals, in order to discriminate multi-stop shoppers from onestop shoppers. Loss leading thus appears as an exploitative device rather than as an exclusionary instrument, although it hurts the smaller rivals as well; banning below-cost pricing increases consumer surplus, rivals’ profits, and social welfare. Our insights extend to industries where established firms compete with entrants offering fewer products. They also apply to complementary products such as platforms and applications.

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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 658.

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Date of creation: 23 Nov 2010
Date of revision: Dec 2011
Publication status: Published in American Economic Review, vol.�102, n°7, 2012, p.�3462-3482.
Handle: RePEc:ide:wpaper:24028

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Keywords: loss leading; exploitative practice; retail power;

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References

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  1. Oecd, 2007. "Resale below Cost Laws and Regulations," OECD Journal: Competition Law and Policy, OECD Publishing, vol. 9(1), pages 169-255.
  2. Armstrong, Mark & Vickers, John, 2006. "Competitive nonlinear pricing and bundling," MPRA Paper 70, University Library of Munich, Germany.
  3. Cleeren, Kathleen & Dekimpe, Marnik G. & Gielens, Katrijn & Verboven, Frank, 2008. "Intra- and Inter-Format Competition Among Discounters and Supermarkets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6964, C.E.P.R. Discussion Papers.
  4. Claire Chambolle, 2000. "Stratégies de revente à perte et réglementation," Working Papers, Centre de Recherche en Economie et Statistique 2000-52, Centre de Recherche en Economie et Statistique.
  5. Weinstein, Jonathan & Ambrus, Attila, 2008. "Price Dispersion and Loss Leaders," Scholarly Articles 4589708, Harvard University Department of Economics.
  6. Paul Dobson & Michael Waterson, 1999. "Retailer power: recent developments and policy implications," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 14(28), pages 133-164, 04.
  7. Patrick Rey & Thibaud Vergé, 2010. "Resale Price Maintenance And Interlocking Relationships," Journal of Industrial Economics, Wiley Blackwell, vol. 58(4), pages 928-961, December.
  8. Roman Inderst & Tommaso M. Valletti, 2008. "Buyer Power and the “Waterbed Effect”," CEIS Research Paper 107, Tor Vergata University, CEIS, revised 10 Jul 2008.
  9. Marie-Laure Allain & Claire Chambolle, 2004. "Loss-leaders Banning Laws as Vertical Restraints," Working Papers, Centre de Recherche en Economie et Statistique 2004-19, Centre de Recherche en Economie et Statistique.
  10. 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.
  11. Inderst, Roman & Wey, Christian, 2007. "Buyer power and supplier incentives," European Economic Review, Elsevier, vol. 51(3), pages 647-667, April.
  12. repec:hrv:faseco:4685158 is not listed on IDEAS
  13. Weinstein, Jonathan & Ambrus, Attila, 2008. "Price dispersion and loss leaders," Theoretical Economics, Econometric Society, Econometric Society, vol. 3(4), December.
  14. Bolton, P. & Brodley, J.F. & Riordan, M.H., 1999. "Predatory Pricing: Strategic Theory and Legal Policy," Discussion Paper, Tilburg University, Center for Economic Research 1999-82, Tilburg University, Center for Economic Research.
  15. Chen, Zhiqi, 2003. " Dominant Retailers and the Countervailing-Power Hypothesis," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 612-25, Winter.
  16. Bliss, Christopher, 1988. "A Theory of Retail Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 375-91, June.
  17. 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.
  18. 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, Elsevier, vol. 19(3), pages 333-347, September.
  19. 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.
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Citations

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. Smith, Howard & Thomassen, Øyvind, 2012. "Multi-category demand and supermarket pricing," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 30(3), pages 309-314.
  2. In, Younghwan & Wright, Julian, 2014. "Loss-leader pricing and upgrades," Economics Letters, Elsevier, vol. 122(1), pages 19-22.
  3. Rosato, Antonio, 2013. "Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs," MPRA Paper 47168, University Library of Munich, Germany.
  4. Roig, Guillem, 2014. "Informative Advertisement of Partial Compatible Products," TSE Working Papers, Toulouse School of Economics (TSE) 14-483, Toulouse School of Economics (TSE).
  5. Noriaki Matsushima & Akira Miyaoka, 2013. "Who benefits from resale-below-cost laws?," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0875, Institute of Social and Economic Research, Osaka University.
  6. Chen, Zhijun & Rey, Patrick, 2013. "Competitive Cross-Subsidization," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 808, Institut d'Économie Industrielle (IDEI), Toulouse.
  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. 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.
  9. Rhodes, Andrew, 2011. "Multiproduct pricing and the Diamond Paradox," MPRA Paper 32511, University Library of Munich, Germany.

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