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Unplanned Purchases and Retail Competition

40 Pages Posted: 4 Sep 2013 Last revised: 7 Oct 2016

Justin P. Johnson

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: October 6, 2016

Abstract

I propose a framework in which asymmetric multi-product retailers compete for one-stop shoppers who have biased beliefs about their future purchase probabilities (and so make unplanned purchases). One firm carries a full portfolio of products while the other carries an incomplete but endogenous one. Using this framework, I examine the phenomenon of loss leading, the optimal product portfolio of the smaller firm, and the effects of banning loss leading. Among other results, I show that there is a non-predatory (and possibly pro-competitive) justification for the observation that such larger firms may charge below cost on the core product lines of their smaller rivals.n.

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

JEL Classification: L1, L4

Suggested Citation

Johnson, Justin P., Unplanned Purchases and Retail Competition (October 6, 2016). Available at SSRN: https://ssrn.com/abstract=2319929 or http://dx.doi.org/10.2139/ssrn.2319929

Justin P. Johnson (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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