DP16946 Loss Leading with Salient Thinkers
|Author(s):||Roman Inderst, Martin Obradovits|
|Publication Date:||January 2022|
|Keyword(s):||Competition law, imposition of price floors, Loss leading, price competition, price promotion, salient-thinking consumers|
|JEL(s):||D11, D22, L11, L15|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=16946|
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.