Rey, Patrick and Chen, Zhijun (2010) Loss Leading as an Exploitative Practice. TSE Working Paper, n. 10-218

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Abstract

Large retailers, enjoying substantial market power in some local markets, often
compete with smaller retailers who carry a narrower range of products in a more
efficient way. We find that these large retailers can exercise their market power by
adopting a loss-leading pricing strategy, which consists of pricing below cost some
of the products also offered by smaller rivals, and raising the prices on the other
products. In this way, the large retailers can better discriminate multi-stop shoppers
from one-stop shoppers — and may even earn more profit than in the absence
of the more efficient rivals. Loss leading thus appears as an exploitative device,
designed to extract additional surplus from multi-stop shoppers, rather than as an
exclusionary instrument to foreclose the market, although the small rivals are hurt
as a by-product of exploitation. We show further that banning below-cost pricing
increases consumer surplus, small rivals’ profits, and social welfare. Our insights
apply generally to industries where a firm, enjoying substantial market power in
one segment, competes with more efficient rivals in other segments, and procuring
these products from the same supplier generates customer-specific benefits. They also apply to complementary products, such as platforms and applications. There
as well, our analysis provides a rationale for below-cost pricing based on exploitation
rather than exclusion.

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  • Loss Leading as an Exploitative Practice. (deposited 09 Jul 2014 17:23)