Loss Leading as an Exploitative Practice
Large retailers, enjoying substantial market power in some local markets, often compete with smaller retailers who carry a narrower range of products in a more efficient way. We find that these large retailers can exercise their market power by adopting a loss-leading pricing strategy, which consists of pricing below cost some of the products also offered by smaller rivals, and raising the prices on the other products. In this way, the large retailers can better discriminate multi-stop shoppers from one-stop shoppers — and may even earn more profit than in the absence of the more efficient rivals. Loss leading thus appears as an exploitative device, designed to extract additional surplus from multi-stop shoppers, rather than as an exclusionary instrument to foreclose the market, although the small rivals are hurt as a by-product of exploitation. We show further that banning below-cost pricing increases consumer surplus, small rivals' profits, and social welfare. Our insights apply generally to industries where a firm, enjoying substantial market power in one segment, competes with more efficient rivals in other segments, and procuring these products from the same supplier generates customer-specific benefits. They also apply to complementary products, such as platforms and applications. There as well, our analysis provides a rationale for below-cost pricing based on exploitation rather than exclusion.
|Date of creation:||29 Nov 2010|
|Date of revision:|
|Note:||View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00540724/en/|
|Contact details of provider:|| Web page: http://hal.archives-ouvertes.fr/ |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Patrick Rey & Thibaud Vergé, 2010.
"Resale Price Maintenance And Interlocking Relationships,"
Journal of Industrial Economics,
Wiley Blackwell, vol. 58(4), pages 928-961, December.
- Patrick REY & Thibaud VERGE, 2009. "Resale Price Maintenance and Interlocking Relationships," Working Papers 2009-11, Centre de Recherche en Economie et Statistique.
- 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.
- Oecd, 2007. "Resale below Cost Laws and Regulations," OECD Journal: Competition Law and Policy, OECD Publishing, vol. 9(1), pages 169-255.
- Zhiqi Chen, 2001.
"Dominant Retailers and the Countervailing Power Hypothesis,"
Carleton Economic Papers
01-05, Carleton University, Department of Economics, revised 2003.
- Chen, Zhiqi, 2003. " Dominant Retailers and the Countervailing-Power Hypothesis," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 612-25, Winter.
- Allain Marie-Laure & Chambolle Claire, 2005.
"Loss-Leaders Banning Laws as Vertical Restraints,"
Journal of Agricultural & Food Industrial Organization,
De Gruyter, vol. 3(1), pages 1-25, February.
- repec:hrv:faseco:4685158 is not listed on IDEAS
- 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.
- Kathleen Cleeren & Frank Verboven & Marnik G. Dekimpe & Katrijn Gielens, 2010. "Intra- and Interformat Competition Among Discounters and Supermarkets," Marketing Science, INFORMS, vol. 29(3), pages 456-473, 05-06.
- Roman Inderst & Christian Wey, 2005.
"Buyer Power and Supplier Incentives,"
Discussion Papers of DIW Berlin
464, DIW Berlin, German Institute for Economic Research.
- Roman Inderst & Christian Wey, 2003. "Buyer Power and Supplier Incentives," CIG Working Papers SP II 2003-05, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
- Inderst, Roman & Wey, Christian, 2002. "Buyer Power and Supplier Incentives," CEPR Discussion Papers 3547, C.E.P.R. Discussion Papers.
- Mark Armstrong & John Vickers, 2010.
"Competitive Non-linear Pricing and Bundling,"
Review of Economic Studies,
Oxford University Press, vol. 77(1), pages 30-60.
- Armstrong, Mark & Vickers, John, 2006. "Competitive nonlinear pricing and bundling," MPRA Paper 70, University Library of Munich, Germany.
- John Vickers & Mark Armstrong, 2006. "Competitive Nonlinear Pricing and Bundling," Economics Series Working Papers 281, University of Oxford, Department of Economics.
- repec:dgr:kubcen:199982 is not listed on IDEAS
- 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.
- Claire CHAMBOLLE, 2005.
"Stratégies de revente à perte et réglementation,"
Annales d'Economie et de Statistique,
ENSAE, issue 77, pages 59-79.
- Weinstein, Jonathan & Ambrus, Attila, 2008. "Price Dispersion and Loss Leaders," Scholarly Articles 4589708, Harvard University Department of Economics.
- 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.
- Roman Inderst & Tommaso M. Valletti, 2011.
"Buyer Power And The ‘Waterbed Effect’,"
Journal of Industrial Economics,
Wiley Blackwell, vol. 59(1), pages 1-20, 03.
- Paul Dobson & Michael Waterson, 1999. "Retailer power: recent developments and policy implications," Economic Policy, CEPR;CES;MSH, vol. 14(28), pages 133-164, 04.
- Bliss, Christopher, 1988. "A Theory of Retail Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 375-91, June.
- 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.
- Weinstein, Jonathan & Ambrus, Attila, 2008. "Price dispersion and loss leaders," Theoretical Economics, Econometric Society, vol. 3(4), December.
When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-00540724. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If references are entirely missing, you can add them using this form.