Seminar

Loss Leading as an Exploitative Practice

Patrick Rey (Toulouse School of Economics)

November 22, 2011, 11:00–12:30

Toulouse

Room Amphi S

Economic Theory Seminar

Abstract

Large retailers often compete with smaller stores carrying a narrower range. We find that large retailers can exercise market power by pricing below cost some of the products also offered by smaller rivals, in order to discriminate multi-stop shoppers from one-stop shoppers. Loss leading then appears as an exploitative device rather than as an exclusionary instrument, although small rivals are hurt in the process; 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