Loss leading with salient thinkers

Roman Inderst and Martin Obradovits ()

RAND Journal of Economics, 2020, vol. 51, issue 1, 260-278

Abstract: In various countries, competition laws restrict retailers' freedom to sell their products below cost. A common rationale, shared by policymakers, consumer interest groups and brand manufacturers alike, is that such “loss leading” of products would ultimately lead to a race‐to‐the‐bottom in product quality. Building on Varian's (1980) model of sales, we provide a foundation for this critique, though only when consumers are salient thinkers, putting too much weight on certain product attributes. But we also show how a prohibition of loss leading can backfire, as it may make it even less attractive for retailers to stock high‐quality products, decreasing both aggregate welfare and consumer surplus.

Date: 2020
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Citations: View citations in EconPapers (15)

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https://doi.org/10.1111/1756-2171.12312

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Working Paper: Loss Leading with Salient Thinkers (2022)
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