IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpio/0401008.html
   My bibliography  Save this paper

Loss Leaders: An Indirect Empirical Test

Author

Listed:
  • Tom S. Lee

    (National Univ. of Singapore)

  • I.P.L. Png

    (National Univ. of Singapore)

Abstract

We apply an indirect method to test for the extent of loss leader pricing. Specifically, the extent of loss leader pricing should increase with the profit from other regularly-priced items. Bookstores customarily use bestsellers as loss leaders. Among conventional bookstores, we found that the bestseller discount systematically increased with the store area, selection of titles, and presence of other product categories. A one standard deviation increase in store area was associated with a 3.7 (± 1.8) higher bestseller percentage discount. Among online stores, we found that the bestseller discount systematically increased with the selection of titles and number of product categories. A one standard deviation increase in selection was associated with a 9.5 (± 2.2) higher bestseller percentage discount.

Suggested Citation

  • Tom S. Lee & I.P.L. Png, 2004. "Loss Leaders: An Indirect Empirical Test," Industrial Organization 0401008, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpio:0401008
    Note: Type of Document - ; pages: 15
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/io/papers/0401/0401008.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Karen Clay & Ramayya Krishnan & Eric Wolff, 2001. "Prices and Price Dispersion on the Web: Evidence from the Online Book Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 49(4), pages 521-539, December.
    2. B. Peter Pashigian & Brian Bowen, 1991. "Why Are Products Sold on Sale?: Explanations of Pricing Regularities," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1015-1038.
    3. Png, I P L, 1991. "Most-Favored-Customer Protection versus Price Discrimination over Time," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 1010-1028, October.
    4. Elizabeth J. Warner & Robert B. Barsky, 1995. "The Timing and Magnitude of Retail Store Markdowns: Evidence from Weekends and Holidays," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 321-352.
    5. J. B. Taylor & M. Woodford (ed.), 1999. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 1, number 1.
    6. James M. MacDonald, 2000. "Demand, Information, and Competition: Why Do Food Prices Fall at Seasonal Demand Peaks?," Journal of Industrial Economics, Wiley Blackwell, vol. 48(1), pages 27-45, March.
    7. 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.
    8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    9. Karen Clay & Ramayya Krishnan & Eric Wolff, 2001. "Prices and Price Dispersion on the Web: Evidence from the Online Book Industry," NBER Chapters, in: E-commerce, pages 521-539, National Bureau of Economic Research, Inc.
    10. Judith A. Chevalier & Anil K. Kashyap & Peter E. Rossi, 2003. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," American Economic Review, American Economic Association, vol. 93(1), pages 15-37, March.
    11. Lazear, Edward P, 1986. "Retail Pricing and Clearance Sales," American Economic Review, American Economic Association, vol. 76(1), pages 14-32, March.
    12. James D. Hess & Eitan Gerstner, 1987. "Loss Leader Pricing and Rain Check Policy," Marketing Science, INFORMS, vol. 6(4), pages 358-374.
    13. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135, Elsevier.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lee Sang-Yong T. & Png Ivan P.L., 2004. "Buyer Shopping Costs and Retail Pricing: An Indirect Empirical Test," Review of Marketing Science, De Gruyter, vol. 2(1), pages 1-22, July.
    2. Timothy Richards, 2007. "A nested logit model of strategic promotion," Quantitative Marketing and Economics (QME), Springer, vol. 5(1), pages 63-91, March.
    3. Saul Lach, 2007. "Immigration and Prices," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 548-587, August.
    4. 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.
    5. Loy, Jens-Peter & Weaver, Robert D., 2003. "Retail Sales: Do They Mean Reduced Expenditures? German Grocery Evidence," 2003 Annual Meeting, August 16-22, 2003, Durban, South Africa 25914, International Association of Agricultural Economists.
    6. Aviv Nevo & Konstantinos Hatzitaskos, 2005. "Why Does the Average Price of Tuna Fall During Lent?," NBER Working Papers 11572, National Bureau of Economic Research, Inc.
    7. Yossi Spiegel & Konrad O. Stahl, 2014. "Industry Structure and Pricing over the Business Cycle," CESifo Working Paper Series 4848, CESifo.
    8. Kocas, Cenk & Pauwels, Koen & Bohlmann, Jonathan D., 2018. "Pricing Best Sellers and Traffic Generators: The Role of Asymmetric Cross-selling," Journal of Interactive Marketing, Elsevier, vol. 41(C), pages 28-43.
    9. Spiegel, Yossi & Stahl, Konrad, 2014. "Industry structure and pricing over the business cycle," ZEW Discussion Papers 14-039, ZEW - Leibniz Centre for European Economic Research.
    10. Li, Chenguang & Sexton, Richard J., 2009. "Impacts of Retailers’ Pricing Strategies for Produce Commodities on Farmer Welfare," 2009 Conference, August 16-22, 2009, Beijing, China 51720, International Association of Agricultural Economists.
    11. Laura Birg & Anna Goeddeke, 2016. "Christmas Economics—A Sleigh Ride," Economic Inquiry, Western Economic Association International, vol. 54(4), pages 1980-1984, October.
    12. 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.
    13. Guler, Ali Umut & Misra, Kanishka & Vilcassim, Naufel, 2014. "Countercyclical pricing: A consumer heterogeneity explanation," Economics Letters, Elsevier, vol. 122(2), pages 343-347.
    14. Alexis Antoniades & Sofronis Clerides & Mingzhi Xu, 2023. "Micro‐responses to shocks: pricing, promotion, and entry," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(3), pages 584-615, July.
    15. Plehn-Dujowich, Jose M., 2008. "On the counter-cyclicality of prices and markups in a Cournot model of entry," Economics Letters, Elsevier, vol. 99(2), pages 310-313, May.
    16. Omid Zamani & Thomas Bittmann & Jens‐Peter Loy, 2019. "Demand peaks and cost pass‐through: The case of Iran's poultry market," Agribusiness, John Wiley & Sons, Ltd., vol. 35(4), pages 657-674, October.
    17. Guler, Ali Umut, 2021. "Seasonal price effects of mergers," Economics Letters, Elsevier, vol. 209(C).
    18. Zhou, Jidong, 2011. "Multiproduct search," MPRA Paper 37139, University Library of Munich, Germany.
    19. Seong‐Hoon Kim & Seongman Moon, 2017. "A Map of Markups: Why We Observe Mixed Behaviors of Markups," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(2), pages 529-553, June.
    20. Hao Lan & Tim Lloyd & Wyn Morgan & Paul W. Dobson, 2022. "Are food price promotions predictable? The hazard function of supermarket discounts," Journal of Agricultural Economics, Wiley Blackwell, vol. 73(1), pages 64-85, February.

    More about this item

    Keywords

    retail pricing; loss leaders; switching costs;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M30 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpio:0401008. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: EconWPA (email available below). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.