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Loss Leaders: An Indirect Empirical Test

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Author Info

  • Tom S. Lee

    (National Univ. of Singapore)

  • I.P.L. Png

    (National Univ. of Singapore)

Abstract

We apply an indirect method to test for the extent of loss leader pricing. Specifically, the extent of loss leader pricing should increase with the profit from other regularly-priced items. Bookstores customarily use bestsellers as loss leaders. Among conventional bookstores, we found that the bestseller discount systematically increased with the store area, selection of titles, and presence of other product categories. A one standard deviation increase in store area was associated with a 3.7 (± 1.8) higher bestseller percentage discount. Among online stores, we found that the bestseller discount systematically increased with the selection of titles and number of product categories. A one standard deviation increase in selection was associated with a 9.5 (± 2.2) higher bestseller percentage discount.

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File URL: http://128.118.178.162/eps/io/papers/0401/0401008.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Industrial Organization with number 0401008.

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Length: 15 pages
Date of creation: 25 Jan 2004
Date of revision:
Handle: RePEc:wpa:wuwpio:0401008

Note: Type of Document - ; pages: 15
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Web page: http://128.118.178.162

Related research

Keywords: retail pricing; loss leaders; switching costs;

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References

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  1. Judith A. Chevalier & Anil K. Kashyap & Peter E. Rossi, 2003. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," American Economic Review, American Economic Association, vol. 93(1), pages 15-37, March.
  2. Edward P. Lazear, 1984. "Retail Pricing and Clearance Sales," NBER Working Papers 1446, National Bureau of Economic Research, Inc.
  3. Julio J. Rotemberg & Michael Woodford, 1999. "The Cyclical Behavior of Prices and Costs," NBER Working Papers 6909, National Bureau of Economic Research, Inc.
  4. Pashigian, B Peter & Bowen, Brian, 1991. "Why Are Products Sold on Sale? Explanations of Pricing Regularities," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1015-38, November.
  5. Karen Clay & Ramayya Krishnan & Eric Wolff, 2001. "Prices and Price Dispersion on the Web: Evidence from the Online Book Industry," NBER Chapters, in: E-commerce, pages 521-539 National Bureau of Economic Research, Inc.
  6. MacDonald, James M, 2000. "Demand, Information, and Competition: Why Do Food Prices Fall at Seasonal Demand Peaks?," Journal of Industrial Economics, Wiley Blackwell, vol. 48(1), pages 27-45, March.
  7. Warner, Elizabeth J & Barsky, Robert B, 1995. "The Timing and Magnitude of Retail Store Markdowns: Evidence from Weekends and Holidays," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 321-52, May.
  8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  9. Png, I P L, 1991. "Most-Favored-Customer Protection versus Price Discrimination over Time," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 1010-28, October.
  10. 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.
  11. James D. Hess & Eitan Gerstner, 1987. "Loss Leader Pricing and Rain Check Policy," Marketing Science, INFORMS, vol. 6(4), pages 358-374.
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