Loss leader or low margin leader? Advertising and the degree of product differentiation
AbstractThis 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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Bibliographic InfoPaper provided by Economic Research Southern Africa in its series Working Papers with number 105.
Date of creation: 2008
Date of revision:
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Informative advertising; loss leader; low margin leader; product diÂ¤erentiation;
Other versions of this item:
- Simbanegavi, Witness, 2008. "Loss leader or low margin leader? Advertising and the degree of product differentiation," MPRA Paper 9694, University Library of Munich, Germany.
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising
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Discussion Papers Series, Department of Economics, Tufts University
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