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Loss Leading as an Exploitative Practice

Author

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  • Zhijun Chen
  • Patrick Rey

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 multistop shoppers from one-stop 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. (JEL L11, L13, L81)

Suggested Citation

  • Zhijun Chen & Patrick Rey, 2012. "Loss Leading as an Exploitative Practice," American Economic Review, American Economic Association, vol. 102(7), pages 3462-3482, December.
  • Handle: RePEc:aea:aecrev:v:102:y:2012:i:7:p:3462-82
    Note: DOI: 10.1257/aer.102.7.3462
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    References listed on IDEAS

    as
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. “Loss Leading as an Exploitative Practice,” Z. Chen & P. Rey (2012)
      by afinetheorem in A Fine Theorem on 2013-07-12 09:27:32

    Citations

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    Cited by:

    1. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, March.
    2. Giacomo Calzolari & Vincenzo Denicol?, 2013. "Competition with Exclusive Contracts and Market-Share Discounts," American Economic Review, American Economic Association, vol. 103(6), pages 2384-2411, October.
    3. Bjørn Olav Johansen & Tore Nilssen, 2016. "The Economics of Retailing Formats: Competition Versus Bargaining," Journal of Industrial Economics, Wiley Blackwell, vol. 64(1), pages 109-134, March.
    4. Chen, Zhijun & Rey, Patrick, 2013. "Competitive Cross-Subsidization," IDEI Working Papers 808, Institut d'Économie Industrielle (IDEI), Toulouse.
    5. Inderst, Roman & Obradovits, Martin, 2015. "Too Much Attention on Low Prices? Loss Leading in a Model of Sales with Salient Thinkers," CEPR Discussion Papers 10813, C.E.P.R. Discussion Papers.
    6. Noriaki Matsushima & Akira Miyaoka, 2013. "Who benefits from resale-below-cost laws?," ISER Discussion Paper 0875, Institute of Social and Economic Research, Osaka University.
    7. Antonio Rosato, 2016. "Selling substitute goods to loss-averse consumers: limited availability, bargains, and rip-offs," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 709-733, August.
    8. Roig, Guillem, 2014. "Informative Advertisement of Partial Compatible Products," TSE Working Papers 14-483, Toulouse School of Economics (TSE).
    9. Guillem Roig, 2017. "Product Compatibility as an Strategy to Hinder Entry Deterrence," DOCUMENTOS DE TRABAJO 015774, UNIVERSIDAD DEL ROSARIO.
    10. 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.
    11. Kaplan, Greg & Menzio, Guido & Rudanko, Leena & Trachter, Nicholas, 2016. "Relative price dispersion: evidence and theory," Working Papers 16-6, Federal Reserve Bank of Philadelphia.
    12. Smith, Howard & Thomassen, Øyvind, 2012. "Multi-category demand and supermarket pricing," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 309-314.
    13. Guillem Roig, 2017. "Product Compatibility as an Strategy to Hinder Entry Deterrence," DOCUMENTOS DE TRABAJO 015773, UNIVERSIDAD DEL ROSARIO.
    14. Justin P. Johnson, 2017. "Unplanned Purchases and Retail Competition," American Economic Review, American Economic Association, vol. 107(3), pages 931-965, March.
    15. Rhodes, Andrew, 2011. "Multiproduct pricing and the Diamond Paradox," MPRA Paper 32511, University Library of Munich, Germany.
    16. Brandão, António & Correia-da-Silva, João & Pinho, Joana, 2014. "Spatial competition between shopping centers," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 234-250.
    17. Rickert, Dennis, 2016. "Consumer state dependence, switching costs, and forward-looking producers. A dynamic discrete choice model applied to the diaper market," Annual Conference 2016 (Augsburg): Demographic Change 145672, Verein für Socialpolitik / German Economic Association.
    18. Ersoy, Fulya Yuksel & Hasker, Kevin & Inci, Eren, 2016. "Parking as a loss leader at shopping malls," Transportation Research Part B: Methodological, Elsevier, vol. 91(C), pages 98-112.
    19. De Borger, Bruno & Russo, Antonio, 2017. "The political economy of pricing car access to downtown commercial districts," Transportation Research Part B: Methodological, Elsevier, vol. 98(C), pages 76-93.
    20. In, Younghwan & Wright, Julian, 2014. "Loss-leader pricing and upgrades," Economics Letters, Elsevier, vol. 122(1), pages 19-22.
    21. Jorge Florez-Acosta & Daniel Herrera-Araujo, 2017. "Multiproduct retailing and buyer power: The effects of product delisting on consumer shopping behavior," PSE Working Papers halshs-01518146, HAL.
    22. Caprice, Stéphane & Shekhar, Shiva, 2017. "Negative consumer value and loss leading," TSE Working Papers 17-835, Toulouse School of Economics (TSE).
    23. Jorge Florez-Acosta & Daniel Herrera-Araujo, 2017. "Multiproduct retailing and buyer power: The effects of product delisting on consumer shopping behavior," PSE Working Papers halshs-01467435, HAL.
    24. Gaston Llanes & Andrea Mantovani & Francisco Ruiz-Aliseda, 2016. "Entry into complementary good markets with network effects," Working Papers 16-12, NET Institute.
    25. Rhodes, Andrew & Zhou, Jidong, 2016. "Consumer Search and Retail Market Structure," MPRA Paper 69484, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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