Price dispersion and loss leaders

, () and , ()
Additional contact information
,: Department of Economics, Harvard University
,: Kellogg School of Management, Northwestern University, and School of Social Science, Institute for Advanced Study
Authors registered in the RePEc Author Service: Jonathan Lewis Weinstein ()

Theoretical Economics, 2008, vol. 3, issue 4

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
References: Add references at CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://econtheory.org/ojs/index.php/te/article/viewFile/20080525/2134/117 (application/pdf)

Related works:
Working Paper: Price Dispersion and Loss Leaders (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:the:publsh:362

Access Statistics for this article

Theoretical Economics is currently edited by Simon Board, Todd D. Sarver, Juuso Toikka, Rakesh Vohra, Pierre-Olivier Weill

More articles in Theoretical Economics from Econometric Society
Bibliographic data for series maintained by Martin J. Osborne ().