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A Rationale for Repealing the 1987 Groceries Order

  • Patrick Paul Walsh

    (Trinity College Dublin and Katholeike Universteit Leuven)

  • Ciara Whelan

    (London School of Economics and Katholeike Universteit Leuven)

A ban on pricing below cost was implemented under the 1987 Groceries Order based on the premise that loss leading used in multi-product retail pricing distorts competition and exploits consumers in the short run, while driving a more concentrated structure and reducing welfare in the long run. Loss leading is examined for multi-product retailers selling in imperfectly competitive market niches with imperfect consumer information. We develop a theoretical argument in a simple two-stage framework that illustrates how loss leading on a subset of products is an equilibrium outcome of price competition that leaves overall welfare equal to that observed under laissez faire.

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File URL: http://www.esr.ie/vol30_1/4_Walsh.pdf
File Function: First version, 1999
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Article provided by Economic and Social Studies in its journal Economic and Social Review.

Volume (Year): 30 (1999)
Issue (Month): 1 ()
Pages: 71-90

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Handle: RePEc:eso:journl:v:30:y:1999:i:1:p:71-90
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  1. Severin Borenstein, 1991. "Selling Costs and Switching Costs: Explaining Retail Gasoline Margins," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 354-369, Autumn.
  2. Giulietti, M., 1995. "Multiproduct Firms' Pricing Behavior in the Italian Grocery Trade," Discussion Papers 9509, Exeter University, Department of Economics.
  3. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-50, March.
  4. Severin Borenstein & Nancy L. Rose, 1991. "Competition and Price Dispersion in the U.S. Airline Industry," NBER Working Papers 3785, National Bureau of Economic Research, Inc.
  5. Shepard, Andrea, 1991. "Price Discrimination and Retail Configuration," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 30-53, February.
  6. Katz, Michael L, 1984. "Price Discrimination and Monopolistic Competition," Econometrica, Econometric Society, vol. 52(6), pages 1453-71, November.
  7. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  8. Bliss, Christopher, 1988. "A Theory of Retail Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 375-91, June.
  9. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn.
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