Loss leader or low margin leader? Advertising and the degree of product differentiation

Witness Simbanegavi

MPRA Paper from University Library of Munich, Germany

Abstract: This paper attempts to isolate the conditions that give rise to loss leader pricing. I show that for sufficiently low distance between firms, the advertised good is priced below cost irrespective of whether firms advertise the same or different products. Instead, if products are sufficiently differentiated, loss leader pricing may result only if firms advertise the low reservation value product, otherwise the advertised good is a low margin leader. Thus, whether the advertised good is a loss leader or a low margin leader is primarily a function of the extent of differentiation between competing firms.

Keywords: Informative advertising; loss leader; low margin leader; product differentiation (search for similar items in EconPapers)
JEL-codes: L1 M3 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-com, nep-mic and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:9694

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