Loss leading with salient thinkers
Corresponding Author
Roman Inderst
Johann Wolfgang Goethe University Frankfurt
Corresponding author. Roman Inderst inderst@finance.uni-frankfurt.de.
Search for more papers by this authorCorresponding Author
Roman Inderst
Johann Wolfgang Goethe University Frankfurt
Corresponding author. Roman Inderst inderst@finance.uni-frankfurt.de.
Search for more papers by this authorWe thank seminar participants at ETH Zurich (May 2015, Zurich), the Barcelona GSE Summer Forum 2015 (June 2015, Barcelona), the Competition and Bargaining in Vertical Chains Workshop 2015 (June 2015, Düsseldorf), EARIE 2015 (August 2015, Munich), the Bergen Competition Policy Conference 2016 (April 2016, Bergen), and IIOC 2017 (April 2017, Boston) for helpful discussions. We are especially indebted to three anonymous reviewers and David Myatt as editor, whose comments have helped to greatly improve the article.
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.
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