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Complementarities, Below-Cost Pricing, and Welfare Losses

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  • Vanessa von Schlippenbach

Abstract

We analyze below-cost pricing in retail markets and examine its impact on social welfare as well as on suppliers' incentives to invest in quality. Considering negotiations about a linear wholesale price between the retailer and her suppliers, we find that below-cost pricing aggravates the double marginalization problem and causes welfare losses compared to a regime where below-cost pricing is banned. Furthermore, suppliers have stronger incentives to invest in high quality products if a ban of below-cost pricing is enforced.

Suggested Citation

  • Vanessa von Schlippenbach, 2008. "Complementarities, Below-Cost Pricing, and Welfare Losses," Discussion Papers of DIW Berlin 788, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp788
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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.83341.de/dp788.pdf
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    References listed on IDEAS

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    Cited by:

    1. Allain, Marie-Laure & Chambolle, Claire, 2011. "Anti-competitive effects of resale-below-cost laws," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 373-385, July.
    2. Noriaki Matsushima & Akira Miyaoka, 2013. "Who benefits from resale-below-cost laws?," ISER Discussion Paper 0875, Institute of Social and Economic Research, Osaka University.

    More about this item

    Keywords

    Complementarities; Retailing; Below-Cost Pricing;

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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