Loss-Leader Pricing on Hybrid Platforms: A Multiproduct Perspective

Abstract

We develop a model of a hybrid platform that hosts multiple products and enables consumers to fill their baskets through one-stop shopping. Each product is supplied by a manufacturer and sold via competing third-party sellers, while the platform also enters as a first-party seller. One-stop shopping turns otherwise independent products into effective complements, creating a cross-product demand externality (the Cournot externality). We show that the platform may optimally price one product below cost (loss-leader pricing) to internalize this Cournot externality, particularly when manufacturers' wholesale prices are high. Ceteris paribus, loss-leader pricing benefits the platform, consumers, and manufacturers, yielding a Pareto improvement. However, this positive outcome may fail to arise---and indeed leave all parties worse off---when manufacturers strategically raise wholesale prices in anticipation of the platform's loss-leading. Our analysis finds that whenever loss-leading is profitable for the platform, it also benefits consumers and manufacturers, providing a procompetitive rationale for first-party selling by hybrid platforms.

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