Discussion paper

DP16946 Loss Leading with Salient Thinkers

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.


Inderst, R and M Obradovits (2022), ‘DP16946 Loss Leading with Salient Thinkers‘, CEPR Discussion Paper No. 16946. CEPR Press, Paris & London. https://cepr.org/publications/dp16946