Loss Leading with Salient Thinkers
51 Pages Posted: 3 Apr 2021
Date Written: August 01, 2019
In various countries, competition laws restrict retailers’ freedom to sell their pro-ducts below cost. A common rationale, shared by policymakers, consumer interestgroups and brand manufacturers alike, is that such “loss leading” of products wouldultimately lead to a race-to-the-bottom in product quality. Building on Varian’s(1980) model of sales, we provide a foundation for this critique, though only whenconsumers are salient thinkers, putting too much weight on certain product attribu-tes. But we also show how a prohibition of loss leading can backfire, as it may makeit even less attractive for retailers to stock high-quality products, decreasing bothaggregate welfare and consumer surplus.
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