Loss Leading with Salient Thinkers

Roman Inderst and Martin Obradovits ()

No 16946, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Loss leading; Price competition; Competition law; Imposition of price floors; Price promotion; Salient-thinking consumers (search for similar items in EconPapers)
JEL-codes: D11 D22 L11 L15 (search for similar items in EconPapers)
Date: 2022-01
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Journal Article: Loss leading with salient thinkers (2020)
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