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T-Space at The University of Toronto Libraries >
Theoretical Economics >
Volume 3, Number 4 (December 2008) >

Please use this identifier to cite or link to this item: http://hdl.handle.net/1807/16695

Title: Price dispersion and loss leaders
Authors: Attila Ambrus; Department of Economics, Harvard University
Jonathan Weinstein; Kellogg School of Management, Northwestern University, and School of Social Science, Institute for Advanced Study
Keywords: Price competition, price dispersion, loss leaders
D40, D43
Issue Date: 1-Dec-2008
Publisher: Theoretical Economics
Citation: Theoretical Economics; Vol 3, No 4 (2008)
Abstract: [This item is a preserved copy. To view the original, visit http://econtheory.org/] Dispersion in retail prices of identical goods is inconsistent with the standard model of price competition among identical firms, which predicts that all prices will be driven down to cost. One common explanation for such dispersion is the use of a loss-leader strategy, in which a firm prices one good below cost in order to attract a higher customer volume for profitable goods. By assuming each consumer is forced to buy all desired goods at a single firm, we create the possibility of an effective loss-leader strategy. We find that such a strategy cannot occur in equilibrium if individual demands are inelastic, or if demands are diversely distributed. We further show that equilibrium loss leaders can occur (and can result in positive profits) if there are demand complementarities, but only with delicate relationships among the preferences of all consumers.
URI: http://hdl.handle.net/1807/16695
Other Identifiers: http://econtheory.org/ojs/index.php/te/article/view/20080525
Rights: Authors who publish in <i>Theoretical Economics</i> will release their articles under the <a href="http://creativecommons.org/licenses/by-nc/2.5/">Creative Commons Attribution-NonCommercial license</a>. This license allows anyone to copy and distribute the article for non-commercial purposes provided that appropriate attribution is given.
Appears in Collections:Volume 3, Number 4 (December 2008)

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