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  3. American Economic Review
  4. March 2017
  5. Unplanned Purchases and Retail Competition

Unplanned Purchases and Retail Competition

  • Justin P. Johnson
American Economic Review
vol. 107, no. 3, March 2017
(pp. 931-65)
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Abstract

I propose a framework in which asymmetric multiproduct retailers compete for one-stop shoppers who have biased beliefs about their future purchase probabilities (and so make unplanned purchases). One firm carries a full portfolio of products while the other carries an incomplete but endogenous one. Using this framework, I examine the phenomenon of loss leading, the optimal product portfolio of the smaller firm, and the effects of banning loss leading. Among other results, I show that there is a nonpredatory (and possibly procompetitive) justification for the observation that such larger firms may charge below cost on the core product lines of their smaller rivals.

Citation

Johnson, Justin P. 2017. "Unplanned Purchases and Retail Competition." American Economic Review, 107 (3): 931-65. DOI: 10.1257/aer.20140605

Additional Materials

JEL Classification

  • D11 Consumer Economics: Theory
  • D21 Firm Behavior: Theory
  • D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • L13 Oligopoly and Other Imperfect Markets
  • L25 Firm Performance: Size, Diversification, and Scope
  • L71 Mining, Extraction, and Refining: Hydrocarbon Fuels
  • L81 Retail and Wholesale Trade; e-Commerce