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Loss-leader pricing and upgrades

Author

Listed:
  • In, Younghwan
  • Wright, Julian

Abstract

A new theory of loss-leader pricing is provided in which firms advertise low (below cost) prices for certain goods to signal that their other unadvertised (substitute) goods are not priced too high. The theory is applied to the pricing of upgrades. The results contrast with most existing loss-leader theories in that firms make a loss on some consumers (who buy the basic version of the good) and a profit on others (who buy the upgrade).

Suggested Citation

  • In, Younghwan & Wright, Julian, 2014. "Loss-leader pricing and upgrades," Economics Letters, Elsevier, vol. 122(1), pages 19-22.
  • Handle: RePEc:eee:ecolet:v:122:y:2014:i:1:p:19-22
    DOI: 10.1016/j.econlet.2013.10.014
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    References listed on IDEAS

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    1. Glenn Ellison, 2005. "A Model of Add-On Pricing," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 585-637.
    2. Kyle Bagwell & Garey Ramey, 1994. "Advertising and Coordination," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 153-171.
    3. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-370, July.
    4. Zhijun Chen & Patrick Rey, 2012. "Loss Leading as an Exploitative Practice," American Economic Review, American Economic Association, vol. 102(7), pages 3462-3482, December.
    5. 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.
    6. James D. Hess & Eitan Gerstner, 1987. "Loss Leader Pricing and Rain Check Policy," Marketing Science, INFORMS, vol. 6(4), pages 358-374.
    7. DeGraba, Patrick, 2006. "The loss leader is a turkey: Targeted discounts from multi-product competitors," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 613-628, May.
    8. Duncan Simester, 1997. "Note. Optimal Promotion Strategies: A Demand-Sided Characterization," Management Science, INFORMS, vol. 43(2), pages 251-256, February.
    9. Duncan Simester, 1995. "Signalling Price Image Using Advertised Prices," Marketing Science, INFORMS, vol. 14(2), pages 166-188.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Asian Development Bank Institute, 2017. "Fossil Fuel Subsidies in Asia: Trends, Impacts, and Reforms - Integrative Report," Working Papers id:11807, eSocialSciences.
    2. Nikola Perovic, 2014. "Psychological Pricing in Modern Retailing: The Case of Wine Sector in Hard-Discounter Chains of Russia," The International Journal of Economic Behavior - IJEB, Faculty of Business and Administration, University of Bucharest, vol. 4(1), pages 83-95.
    3. Hittinger, Eric & Lueken, Roger, 2015. "Is inexpensive natural gas hindering the grid energy storage industry?," Energy Policy, Elsevier, vol. 87(C), pages 140-152.
    4. Matzke, Andreas & Volling, Thomas & Spengler, Thomas S., 2016. "Upgrade auctions in build-to-order manufacturing with loss-averse customers," European Journal of Operational Research, Elsevier, vol. 250(2), pages 470-479.
    5. Crisan Lucian Ciprian, 2014. "U.S. Navy Seals - A Role model for the modern leadership," Proceedings of International Academic Conferences 0902784, International Institute of Social and Economic Sciences.
    6. 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.
    7. repec:but:manage:v:4:y:2014:i:1:p:83-95 is not listed on IDEAS

    More about this item

    Keywords

    Signaling; Loss leader; Advertising; Upgrades;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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