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Loss Leading as an Exploitative Practice

Author Info

  • 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)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.7.3462
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File URL: http://www.aeaweb.org/aer/data/dec2012/20101524_app.pdf
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 7 (December)
Pages: 3462-82

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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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Find related papers by 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

References listed on IDEAS
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  1. Farrell, Joseph & Katz, Michael L, 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 413-32, December.
  2. Paul Dobson & Michael Waterson, 1999. "Retailer power: recent developments and policy implications," Economic Policy, CEPR;CES;MSH, vol. 14(28), pages 133-164, 04.
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  4. Skidmore, Mark & Peltier, James & Alm, James, 2005. "Do state motor fuel sales-below-cost laws lower prices?," Journal of Urban Economics, Elsevier, vol. 57(1), pages 189-211, January.
  5. Marie-Laure Allain & Claire Chambolle, 2007. "Loss leaders banning laws as vertical restraints," Post-Print hal-00242935, HAL.
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  8. Weinstein, Jonathan & Ambrus, Attila, 2008. "Price dispersion and loss leaders," Theoretical Economics, Econometric Society, vol. 3(4), December.
  9. Inderst, Roman & Wey, Christian, 2002. "Buyer Power and Supplier Incentives," CEPR Discussion Papers 3547, C.E.P.R. Discussion Papers.
  10. Gijsbrechts, E. & Campo, K. & Nisol, P., 2005. "Beyond Promotion-Based Store Switching : Antecedents and Consequences of Systematic Multiple-Store Shopping," Discussion Paper 2005-76, Tilburg University, Center for Economic Research.
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  18. Claire Chambolle, 2005. "Stratégies de revente à perte et réglementation," Annals of Economics and Statistics, GENES, issue 77, pages 59-79.
  19. Cleeren, Kathleen & Dekimpe, Marnik G. & Gielens, Katrijn & Verboven, Frank, 2008. "Intra- and Inter-Format Competition Among Discounters and Supermarkets," CEPR Discussion Papers 6964, C.E.P.R. Discussion Papers.
  20. Walsh, Patrick Paul & Whelan, Ciara, 1999. "Loss leading and price intervention in multiproduct retailing: welfare outcomes in a second-best world1," International Review of Law and Economics, Elsevier, vol. 19(3), pages 333-347, September.
  21. T. Randolph Beard & Michael L. Stern, 2008. "CONTINUOUS CROSS SUBSIDIES AND QUANTITY RESTRICTIONS -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 56(4), pages 840-861, December.
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  23. 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.
  24. Carmen Matutes & Pierre Regibeau, 1988. ""Mix and Match": Product Compatibility without Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 221-234, Summer.
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Full references (including those not matched with items on IDEAS)

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 04:27:32
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:

  1. Kaplan, Greg & Menzio, Guido & Rudanko, Leena & Trachter, Nicholas, 2016. "Relative price dispersion: evidence and theory," Working Papers 16-6, Federal Reserve Bank of Philadelphia.
  2. António Brandão & João Correia-da-Silva & Joana Pinho, 2010. "Spatial competition between shopping centers," FEP Working Papers 394, Universidade do Porto, Faculdade de Economia do Porto.
  3. Chen, Zhijun & Rey, Patrick, 2013. "Competitive Cross-Subsidization," TSE Working Papers 13-450, Toulouse School of Economics (TSE), revised 29 Apr 2016.
  4. Noriaki Matsushima & Akira Miyaoka, 2013. "Who benefits from resale-below-cost laws?," ISER Discussion Paper 0875, Institute of Social and Economic Research, Osaka University.
  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. Rhodes, Andrew & Zhou, Jidong, 2016. "Consumer Search and Retail Market Structure," MPRA Paper 69484, University Library of Munich, Germany.
  7. Rhodes, Andrew, 2011. "Multiproduct pricing and the Diamond Paradox," MPRA Paper 32511, University Library of Munich, Germany.
  8. 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.
  9. Smith, Howard & Thomassen, Øyvind, 2012. "Multi-category demand and supermarket pricing," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 309-314.
  10. Roig, Guillem, 2014. "Informative Advertisement of Partial Compatible Products," TSE Working Papers 14-483, Toulouse School of Economics (TSE).
  11. Rosato, Antonio, 2013. "Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs," MPRA Paper 47168, University Library of Munich, Germany.
  12. In, Younghwan & Wright, Julian, 2014. "Loss-leader pricing and upgrades," Economics Letters, Elsevier, vol. 122(1), pages 19-22.

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