Complementarities, Below-Cost Pricing, and Welfare Losses

Vanessa von Schlippenbach

No 788, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

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.

Keywords: Complementarities; Retailing; Below-Cost Pricing (search for similar items in EconPapers)
JEL-codes: L22 L42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-mic and nep-net
Date: Written 2008
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Persistent link: http://EconPapers.repec.org/RePEc:diw:diwwpp:dp788

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