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Loss leader or low margin leader? Advertising and the degree of product differentiation

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Author Info
Simbanegavi, Witness

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Abstract

This paper attempts to isolate the conditions that give rise to loss leader pricing. I show that for sufficiently low distance between firms, the advertised good is priced below cost irrespective of whether firms advertise the same or different products. Instead, if products are sufficiently differentiated, loss leader pricing may result only if firms advertise the low reservation value product, otherwise the advertised good is a low margin leader. Thus, whether the advertised good is a loss leader or a low margin leader is primarily a function of the extent of differentiation between competing firms.

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File URL: http://mpra.ub.uni-muenchen.de/9694/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9694.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:9694

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Related research
Keywords: Informative advertising; loss leader; low margin leader; product differentiation;

Find related papers by JEL classification:
M3 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising
L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  1. Bagwell, Kyle & Ramey, Garey, 1994. "Advertising and Coordination," Review of Economic Studies, Blackwell Publishing, vol. 61(1), pages 153-72, January. [Downloadable!] (restricted)
    Other versions:
  2. Kyle Bagwell, 2005. "The Economic Analysis of Advertising," Discussion Papers 0506-01, Columbia University, Department of Economics. [Downloadable!]
    Other versions:
  3. Jeffrey Milyo & Joel Waldfogel, 1999. "The Effect of Price Advertising on Prices: Evidence in the Wake of 44 Liquormart," American Economic Review, American Economic Association, vol. 89(5), pages 1081-1096, December. [Downloadable!] (restricted)
    Other versions:
  4. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 63-81, January. [Downloadable!] (restricted)
  5. Glenn Ellison, 2004. "A Model of Add-on Pricing," Economics Working Papers 0049, Institute for Advanced Study, School of Social Science. [Downloadable!]
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  6. DeGraba, Patrick, 2006. "The loss leader is a turkey: Targeted discounts from multi-product competitors," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 613-628, May. [Downloadable!] (restricted)
  7. Bagwell, Kyle & Ramey, Garey, 1994. "Coordination Economies, Advertising, and Search Behavior in Retail Markets," American Economic Review, American Economic Association, vol. 84(3), pages 498-517, June. [Downloadable!] (restricted)
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  8. Benham, Lee, 1972. "The Effect of Advertising on the Price of Eyeglasses," Journal of Law & Economics, University of Chicago Press, vol. 15(2), pages 337-52, October.
  9. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July. [Downloadable!] (restricted)
  10. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 465-91, October. [Downloadable!] (restricted)
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