Retail Pricing and Advertising Strategies

Abstract

We study pricing and advertising strategies of retailers competing for the demand of an assortment of goods. In a model where uninformed rational consumers decide where to buy each product, we find that firms advertise prices below marginal cost to attract consumers into the store and profit from other goods which consumers plan to buy at the store. Incorporating product line decisions indicates that firms do not restrict their product assortment even when they make a loss on one of the goods. Finally, products with lower reservation prices are shown to be more natural candidates for loss-leader pricing.

JEL Classification: M37