Working Paper: CEPR ID: DP16946
Authors: Roman Inderst; Martin Obradovits
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.
Keywords: loss leading; price competition; competition law; imposition of price floors; price promotion; salient thinking
JEL Codes: D11; D22; L11; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumer salience (D12) | Availability of high-quality products (L15) |
| Loss leading (D43) | Availability of high-quality products (L15) |
| Prohibition of loss leading (L42) | Availability of high-quality products (L15) |
| Prohibition of loss leading (L42) | Retailer incentives (L81) |
| Retailer incentives (L81) | Availability of high-quality products (L15) |