Loss Leading with Salient Thinkers

51 Pages Posted: 3 Apr 2021

See all articles by Roman Inderst

Roman Inderst

Goethe University Frankfurt

Martin Obradovits

Goethe University Frankfurt

Date Written: August 01, 2019

Abstract

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.

Suggested Citation

Inderst, Roman and Obradovits, Martin, Loss Leading with Salient Thinkers (August 01, 2019). RAND Journal of Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3811943

Roman Inderst (Contact Author)

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60629
Germany
+49 (69) 798-34601 (Phone)
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HOME PAGE: http://www.wiwi.uni-frankfurt.de/en/departments/finance/lehrstuhl/prof-dr-roman-inderst/team

Martin Obradovits

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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