Price Dispersion and Loss Leader Pricing: Evidence from the Online Book Industry

Management Science, Vol. 59, No. 6, pp. 1290-1308, 2013

33 Pages Posted: 13 Aug 2012 Last revised: 22 Jun 2014

See all articles by Xinxin Li

Xinxin Li

University of Connecticut - Department of Operations & Information Management

Bin Gu

Boston University - Department of Management Information Systems

Hongju Liu

Peking University - Guanghua School of Management

Date Written: August 1, 2012

Abstract

In this paper, we develop a theoretical model to analyze the pricing strategies of competing retailers with asymmetric cross-selling capabilities when product demand changes. Our results suggest that retailers with better opportunities for cross-selling have higher incentives to adopt loss leader pricing on high demand products than retailers with low cross-selling capabilities. As a result, price dispersion of a product across retailers rises when its demand increases. The predictions of our model are consistent with the empirical evidence from the online book retailing industry. Using product breadth as a proxy for cross-selling capability, we find that retailers with high cross-selling capabilities reduce prices on bestsellers more aggressively than retailers with low cross-selling capabilities. As a result, price dispersion increases when a book makes to the bestseller list, and the increase is mainly driven by the difference in pricing behavior between retailers with different cross-selling capabilities. Our empirical results are robust against a number of alternative explanations.

Keywords: Price Dispersion, Loss Leader Strategy, Competitive Pricing, Cross-selling Capability

JEL Classification: C23, C33, D43, L86, M31

Suggested Citation

Li, Xinxin and Gu, Bin and Liu, Hongju, Price Dispersion and Loss Leader Pricing: Evidence from the Online Book Industry (August 1, 2012). Management Science, Vol. 59, No. 6, pp. 1290-1308, 2013, Available at SSRN: https://ssrn.com/abstract=2128372 or http://dx.doi.org/10.2139/ssrn.2128372

Xinxin Li (Contact Author)

University of Connecticut - Department of Operations & Information Management ( email )

2100A Hillside Rd
Storrs, CT 06269
United States
(860) 486-3062 (Phone)

Bin Gu

Boston University - Department of Management Information Systems ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Hongju Liu

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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