References (37)



Unplanned Purchases and Retail Competition

Justin P. Johnson

Cornell University - Samuel Curtis Johnson Graduate School of Management

May 5, 2014

I propose a framework in which consumers have biased beliefs about their future purchase probabilities, leading them to make unplanned purchases. Using this framework, I examine the phenomenon of below-cost pricing and the welfare effects of banning it. When the market is covered, a ban on below-cost pricing raises social surplus, although consumers need not gain --- they are only guaranteed to benefit if the market is perfectly competitive. When the market is not covered, a ban always hurts at least some consumers. Also, there is a pro-competitive justification for the observation that larger firms sometimes charge below cost on the core product lines of smaller firms --- consumer bias is crucial for this justification.

Number of Pages in PDF File: 31

Keywords: Unplanned Purchase, Bias, Loss leading, Below Cost Pricing

JEL Classification: L1, L4

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Date posted: September 4, 2013 ; Last revised: June 30, 2015

Suggested Citation

Johnson, Justin P., Unplanned Purchases and Retail Competition (May 5, 2014). Available at SSRN: http://ssrn.com/abstract=2319929 or http://dx.doi.org/10.2139/ssrn.2319929

Contact Information

Justin P. Johnson (Contact Author)
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States

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References:  37

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