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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)

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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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Publisher 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
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Handle: RePEc:wpa:wuwpio:0401008

Note: Type of Document - ; pages: 15
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Web page: http://129.3.20.41

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Related research
Keywords: retail pricing loss leaders switching costs

Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
M30 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. MacDonald, James M, 2000. "Demand, Information, and Competition: Why Do Food Prices Fall at Seasonal Demand Peaks?," Journal of Industrial Economics, Blackwell Publishing, vol. 48(1), pages 27-45, March. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
    Other versions:
  3. Julio J. Rotemberg & Michael Woodford, 1999. "The Cyclical Behavior of Prices and Costs," NBER Working Papers 6909, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Karen Clay & Ramayya Krishnan & Eric Wolff, 2001. "Prices and Price Dispersion on the Web: Evidence from the Online Book Industry," NBER Working Papers 8271, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. 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. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  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. Lazear, Edward P, 1986. "Retail Pricing and Clearance Sales," American Economic Review, American Economic Association, vol. 76(1), pages 14-32, March. [Downloadable!] (restricted)
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