Price Dispersion and Loss-Leader Pricing: Evidence from the Online Book Industry

Xinxin Li (), Bin Gu () and Hongju Liu ()
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Xinxin Li: Department of Operations and Information Management, School of Business, University of Connecticut, Storrs, Connecticut 06269
Bin Gu: Department of Information Systems, W. P. Carey School of Business, Arizona State University, Tempe, Arizona 85287
Hongju Liu: Department of Marketing, School of Business, University of Connecticut, Storrs, Connecticut 06269

Management Science, 2013, vol. 59, issue 6, 1290-1308

Abstract: In this paper, we develop a theoretical model to analyze the pricing strategies of competing retailers with asymmetric cross-selling capabilities when product demand changes. Our results suggest that retailers with better opportunities for cross-selling have higher incentives to adopt loss-leader pricing on high-demand products than retailers with low cross-selling capabilities. As a result, price dispersion of a product across retailers rises when its demand increases. The predictions of our model are consistent with the empirical evidence from the online book retailing industry. Using product breadth as a proxy for cross-selling capability, we find that retailers with high cross-selling capabilities reduce prices on best sellers more aggressively than retailers with low cross-selling capabilities. As a result, price dispersion increases when a book makes it to the best-seller list, and the increase is mainly driven by the difference in pricing behavior between retailers with different cross-selling capabilities. Our empirical results are robust against a number of alternative explanations. This paper was accepted by Sandra Slaughter, information systems.

Keywords: price dispersion; loss-leader strategy; competitive pricing; cross-selling capability (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (19)

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