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Loss Leading as an Exploitative Practice

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  • Rey, Patrick
  • Chen, Zhijun

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 multi-stop shoppers from onestop 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.

Suggested Citation

  • Rey, Patrick & Chen, Zhijun, 2010. "Loss Leading as an Exploitative Practice," IDEI Working Papers 658, Institut d'Économie Industrielle (IDEI), Toulouse, revised Dec 2011.
  • Handle: RePEc:ide:wpaper:24028
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    References listed on IDEAS

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    Cited by:

    1. Chen, Zhijun & Rey, Patrick, 2013. "Competitive Cross-Subsidization," IDEI Working Papers 808, Institut d'Économie Industrielle (IDEI), Toulouse.
    2. Roig, Guillem, 2014. "Informative Advertisement of Partial Compatible Products," TSE Working Papers 14-483, Toulouse School of Economics (TSE).
    3. Smith, Howard & Thomassen, Øyvind, 2012. "Multi-category demand and supermarket pricing," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 309-314.
    4. Brandão, António & Correia-da-Silva, João & Pinho, Joana, 2014. "Spatial competition between shopping centers," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 234-250.
    5. Kaplan, Greg & Menzio, Guido & Rudanko, Leena & Trachter, Nicholas, 2016. "Relative Price Dispersion: Evidence and Theory," Working Paper 16-2, Federal Reserve Bank of Richmond.
    6. In, Younghwan & Wright, Julian, 2014. "Loss-leader pricing and upgrades," Economics Letters, Elsevier, vol. 122(1), pages 19-22.
    7. Giacomo Calzolari & Vincenzo Denicol?, 2013. "Competition with Exclusive Contracts and Market-Share Discounts," American Economic Review, American Economic Association, vol. 103(6), pages 2384-2411, October.
    8. Guillem Roig, 2017. "Product Compatibility as an Strategy to Hinder Entry Deterrence," DOCUMENTOS DE TRABAJO 015773, UNIVERSIDAD DEL ROSARIO.
    9. 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.
    10. 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.
    11. Caprice, Stéphane & Shekhar, Shiva, 2017. "Negative consumer value and loss leading," TSE Working Papers 17-835, Toulouse School of Economics (TSE).
    12. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107069978.
    13. Noriaki Matsushima & Akira Miyaoka, 2013. "Who benefits from resale-below-cost laws?," ISER Discussion Paper 0875, Institute of Social and Economic Research, Osaka University.
    14. Guillem Roig, 2017. "Product Compatibility as an Strategy to Hinder Entry Deterrence," DOCUMENTOS DE TRABAJO 015774, UNIVERSIDAD DEL ROSARIO.
    15. Rickert, Dennis, 2016. "Consumer state dependence, switching costs, and forward-looking producers. A dynamic discrete choice model applied to the diaper market," Annual Conference 2016 (Augsburg): Demographic Change 145672, Verein für Socialpolitik / German Economic Association.
    16. Gaston Llanes & Andrea Mantovani & Francisco Ruiz-Aliseda, 2016. "Entry into complementary good markets with network effects," Working Papers 16-12, NET Institute.
    17. Rhodes, Andrew & Zhou, Jidong, 2016. "Consumer Search and Retail Market Structure," MPRA Paper 69484, University Library of Munich, Germany.
    18. Bjørn Olav Johansen & Tore Nilssen, 2016. "The Economics of Retailing Formats: Competition Versus Bargaining," Journal of Industrial Economics, Wiley Blackwell, vol. 64(1), pages 109-134, March.
    19. 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.
    20. 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.
    21. Justin P. Johnson, 2017. "Unplanned Purchases and Retail Competition," American Economic Review, American Economic Association, vol. 107(3), pages 931-965, March.
    22. Rhodes, Andrew, 2011. "Multiproduct pricing and the Diamond Paradox," MPRA Paper 32511, University Library of Munich, Germany.
    23. De Borger, Bruno & Russo, Antonio, 2017. "The political economy of pricing car access to downtown commercial districts," Transportation Research Part B: Methodological, Elsevier, vol. 98(C), pages 76-93.
    24. Jorge Florez-Acosta & Daniel Herrera-Araujo, 2017. "Multiproduct retailing and buyer power: The effects of product delisting on consumer shopping behavior," PSE Working Papers halshs-01518146, HAL.
    25. Jorge Florez-Acosta & Daniel Herrera-Araujo, 2017. "Multiproduct retailing and buyer power: The effects of product delisting on consumer shopping behavior," PSE Working Papers halshs-01467435, HAL.

    More about this item

    Keywords

    loss leading; exploitative practice; retail power;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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