Unplanned Purchases and Retail Competition
40 Pages Posted: 4 Sep 2013 Last revised: 7 Oct 2016
Date Written: October 6, 2016
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: Suggested Citation