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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 University of Toulouse 1 Capitole in its series Open Access publications from University of Toulouse 1 Capitole with number http://neeo.univ-tlse1.fr/3306/.

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Date of creation: 2012
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Publication status: Published in American Economic Review (2012) v.102, p.3462-3482
Handle: RePEc:ner:toulou:http://neeo.univ-tlse1.fr/3306/

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Web page: http://www.univ-tlse1.fr/

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Cited by:
  1. 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.
  2. Rhodes, Andrew, 2011. "Multiproduct pricing and the Diamond Paradox," MPRA Paper 32511, University Library of Munich, Germany.

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