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Unplanned Purchases and Retail Competition

Justin P. Johnson

American Economic Review, 2017, vol. 107, issue 3, 931-65

Abstract: I propose a framework in which asymmetric multiproduct retailers compete for one-stop shoppers who have biased beliefs about their future purchase probabilities (and so make unplanned purchases). One firm carries a full portfolio of products while the other carries an incomplete but endogenous one. Using this framework, I examine the phenomenon of loss leading, the optimal product portfolio of the smaller firm, and the effects of banning loss leading. Among other results, I show that there is a nonpredatory (and possibly procompetitive) justification for the observation that such larger firms may charge below cost on the core product lines of their smaller rivals.

JEL-codes: D11 D21 D83 L13 L25 L71 L81 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.20140605
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