Working Paper: CEPR ID: DP10813
Authors: Roman Inderst; Martin Obradovits
Abstract: Loss leading is analyzed in a model of promotions (as in Varian 1980) with limited consumer attention: (i) Consumers only compare prices of a selected number of products and (ii) they may pay more attention either to price or quality, depending on the salience of the respective attributes. When consumers have standard preferences, which is our benchmark case, manufacturers benefit when one-stop shopping induces retailers to discount their products, as this expands demand. Results are strikingly different when consumers are salient thinkers. When one-stop shopping or retail competition increases the scope for loss leading, manufacturers' profits decline and there may be an inefficient substitution to lower-quality products. In particular, shoppers who compare products may end up with a choice that is strictly inferior to that of non-shoppers who are locked in to a (local) retailer. Our analysis has implications both for competition policy, as we analyze the implications of a ban on loss leading, and for marketing, as we also analyze how salience affects retailers' product and promotion strategies.
Keywords: Limited Attention; Loss Leading; Manufacturer Profits; Product Choice; Promotions; Quality Choice; Retailing; Sales; Salience
JEL Codes: D21; D43; D83; L11; L13; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in onestop shopping (L81) | decline in manufacturers' profits (L16) |
| increase in retail competition (L81) | decline in manufacturers' profits (L16) |
| increase in retail competition (L81) | lower quality substitution (L15) |
| consumer attention biases (D91) | quality of products purchased (L15) |
| prohibition of below-cost pricing (L11) | shift towards lower-quality products (L15) |