Reference

Patrick Rey, and Zhijun Chen, Loss Leading as an Exploitative Practice, American Economic Review, vol. 102, n. 7, 2012, pp. 3462–3482.

Abstract

We show that large retailers, competing with smaller stores that carry a narrower range, can exercise market power by pricing below cost some of the products also offered by the smaller rivals, in order to discriminate multi-stop shoppers from onestop shoppers. Loss leading thus appears as an exploitative device rather than as an exclusionary instrument, although it hurts the smaller rivals as well; banning below-cost pricing increases consumer surplus, rivals’ profits, and social welfare. Our insights extend to industries where established firms compete with entrants offering fewer products. They also apply to complementary products such as platforms and applications.

Keywords

loss leading; exploitative practice; retail power;

JEL codes

  • L11: Production, Pricing, and Market Structure • Size Distribution of Firms
  • L41: Monopolization • Horizontal Anticompetitive Practices
  • Replaces

    Patrick Rey, and Zhijun Chen, Loss Leading as an Exploitative Practice, TSE Working Paper, n. 10-218, November 23, 2010, revised December 2011.