Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/150121 
Year of Publication: 
2008
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 3 [Issue:] 4 [Publisher:] The Econometric Society [Place:] New York, NY [Year:] 2008 [Pages:] 525-537
Publisher: 
The Econometric Society, New York, NY
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.
Subjects: 
Price competition
price dispersion
loss leaders
JEL: 
D40
D43
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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