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American Economic Review: Vol. 102 No. 7 (December 2012)

AER Volume. 102, Issue 7 | Previous ArticleNext Article

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Loss Leading as an Exploitative Practice

Article Citation

Chen, Zhijun, and Patrick Rey. 2012. "Loss Leading as an Exploitative Practice." American Economic Review, 102(7): 3462-82.

DOI: 10.1257/aer.102.7.3462

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 multistop shoppers from one-stop 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. (JEL L11, L13, L81)

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Online Appendix (201.29 KB)

Authors

Chen, Zhijun (U Auckland and Ecole Polytechnique, Palaiseau)
Rey, Patrick (Toulouse School of Economics)

JEL Classifications

L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L13: Oligopoly and Other Imperfect Markets
L81: Retail and Wholesale Trade; e-Commerce