Unplanned Purchases and Retail Competition
Justin P. Johnson
Cornell University - Samuel Curtis Johnson Graduate School of Management
April 17, 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
Date posted: September 4, 2013 ; Last revised: April 17, 2014
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