Loss-Leader Pricing on Hybrid Platforms: A Multiproduct Perspective

Abstract

We develop a model of a hybrid platform that hosts multiple products and serves one-stop shoppers, and study when and how first-party selling can be used to implement loss-leader pricing in the presence of upstream manufacturers. One-stop shopping turns otherwise independent products into effective complements, creating cross-product demand spillovers that are left uninternalized when prices are set independently by different sellers. By entering selected categories as a seller, the platform can use loss-leading as a cross-product price-coordination device. Our main message is that the profitability and welfare effects of platform loss-leading hinge on how upstream wholesale prices respond. When wholesale prices are relatively rigid, loss-leading lowers the total price paid for the basket (the basket price), expands demand, and benefits the platform, consumers, and manufacturers alike. When manufacturers can strategically adjust wholesale prices in anticipation of loss-leading, however, they raise wholesale prices (a wholesale-price squeeze), and the resulting loss-leading equilibrium increases the basket price and reduces both consumer surplus and the platform's profit; manufacturers may nonetheless benefit when the commission rate is sufficiently low. These results imply that platforms should view upstream wholesale-price rigidity as a key boundary condition for profitable loss-leading, and that evaluating the competitive and welfare effects of first-party selling and loss-leader pricing requires accounting for upstream wholesale-pricing incentives, not only the platform's retail-pricing incentives.

Keywords: Multiproduct Intermediary, One-Stop Shopping, Hybrid Platform, Loss Leading, Wholesale Price Squeeze