Loss Leading as an Exploitative Practice
Chen, Zhijun, and
Patrick Rey. 2012. "Loss Leading as an Exploitative Practice."
American Economic Review,
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)
Article Full-Text Access
Chen, Zhijun (U Auckland and Ecole Polytechnique, Palaiseau)
Rey, Patrick (Toulouse School of Economics)
L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L13: Oligopoly and Other Imperfect Markets
L81: Retail and Wholesale Trade; e-Commerce