Price dispersion and loss leaders

Jonathan Weinstein () and Attila Ambrus ()
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Jonathan Weinstein: Kellogg School of Management, Northwestern University, and School of Social Science, Institute for Advanced Study
Attila Ambrus: Department of Economics, Harvard University

Theoretical Economics, 2008, vol. 3, issue 4, pages 525-537

Abstract: Dispersion in retail prices of identical goods is inconsistent with the standard model of price competition among identical firms, which predicts that all prices will be driven down to cost. One common explanation for such dispersion is the use of a loss-leader strategy, in which a firm prices one good below cost in order to attract a higher customer volume for profitable goods. By assuming each consumer is forced to buy all desired goods at a single firm, we create the possibility of an effective loss-leader strategy. We find that such a strategy cannot occur in equilibrium if individual demands are inelastic, or if demands are diversely distributed. We further show that equilibrium loss leaders can occur (and can result in positive profits) if there are demand complementarities, but only with delicate relationships among the preferences of all consumers.

Keywords: Price competition; price dispersion; loss leaders (search for similar items in EconPapers)
JEL-codes: D40 D43 (search for similar items in EconPapers)
Date: 2008-12-01

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