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- Title
Loss leading with salient thinkers.
- Authors
Inderst, Roman; Obradovits, Martin
- Abstract
In various countries, competition laws restrict retailers' freedom to sell their products below cost. A common rationale, shared by policymakers, consumer interest groups and brand manufacturers alike, is that such "loss leading" of products would ultimately 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 when consumers are salient thinkers, putting too much weight on certain product attributes. But we also show how a prohibition of loss leading can backfire, as it may make it even less attractive for retailers to stock high‐quality products, decreasing both aggregate welfare and consumer surplus.
- Subjects
UNFAIR competition; CONSUMERS' surplus; PRODUCT attributes; PRODUCT quality; PRODUCT costing
- Publication
RAND Journal of Economics (Wiley-Blackwell), 2020, Vol 51, Issue 1, p260
- ISSN
0741-6261
- Publication type
Article
- DOI
10.1111/1756-2171.12312