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Unplanned Purchases and Retail Competition

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  • Justin P. Johnson

Abstract

I propose a framework in which asymmetric multiproduct retailers compete for one-stop shoppers who have biased beliefs about their future purchase probabilities (and so make unplanned purchases). One firm carries a full portfolio of products while the other carries an incomplete but endogenous one. Using this framework, I examine the phenomenon of loss leading, the optimal product portfolio of the smaller firm, and the effects of banning loss leading. Among other results, I show that there is a nonpredatory (and possibly procompetitive) justification for the observation that such larger firms may charge below cost on the core product lines of their smaller rivals.

Suggested Citation

  • Justin P. Johnson, 2017. "Unplanned Purchases and Retail Competition," American Economic Review, American Economic Association, vol. 107(3), pages 931-965, March.
    • Handle: RePEc:aea:aecrev:v:107:y:2017:i:3:p:931-65
    Note: DOI: 10.1257/aer.20140605
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Richard Friberg & Frode Steen & Simen A. Ulsaker, 2022. "Hump-Shaped Cross-Price Effects and the Extensive Margin in Cross-Border Shopping," American Economic Journal: Microeconomics, American Economic Association, vol. 14(2), pages 408-438, May.
    2. Roman Inderst & Martin Obradovits, 2023. "Excessive Competition On Headline Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(2), pages 783-808, May.
    3. Yu, Yang & Jaenicke, Edward C., 2021. "The effect of sell-by dates on purchase volume and food waste," Food Policy, Elsevier, vol. 98(C).
    4. Jia Niu & Shanshan Jin & Ge Chen & Xianhui Geng, 2024. "How Can Price Promotions Make Consumers More Interested? An Empirical Study from a Chinese Supermarket," Sustainability, MDPI, vol. 16(6), pages 1-21, March.
    5. Andrew Rhodes & Jidong Zhou, 2019. "Consumer Search and Retail Market Structure," Management Science, INFORMS, vol. 67(6), pages 2607-2623, June.
    6. Jean Hindriks & Leonardo Madio & Valerio Serse, 2021. "Promotion Ban and Heterogeneity in Retail Prices during the Great Lockdown," CESifo Working Paper Series 9074, CESifo.
    7. Fabian Herweg & Antonio Rosato, 2020. "Bait and ditch: Consumer naïveté and salesforce incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(1), pages 97-121, January.
    8. Raluca M. Ursu & Daria Dzyabura, 2020. "Retailers’ product location problem with consumer search," Quantitative Marketing and Economics (QME), Springer, vol. 18(2), pages 125-154, June.
    9. Justin P. Johnson & Andrew Rhodes, 2021. "Multiproduct mergers and quality competition," RAND Journal of Economics, RAND Corporation, vol. 52(3), pages 633-661, September.
    10. Heidhues, Paul & Köszegi, Botond, 2018. "Behavioral Industrial Organization," CEPR Discussion Papers 12988, C.E.P.R. Discussion Papers.
    11. Stephane Caprice & Shiva Shekhar, 2019. "Negative market value and loss leading," Economics Bulletin, AccessEcon, vol. 39(1), pages 94-103.
    12. Hao Lan & Tim Lloyd & Wyn Morgan & Paul W. Dobson, 2022. "Are food price promotions predictable? The hazard function of supermarket discounts," Journal of Agricultural Economics, Wiley Blackwell, vol. 73(1), pages 64-85, February.
    13. Leung,Justin H. & Hee Kwon (Samuel) Seo, 2022. "How Do Government Transfer Payments Affect Retail Prices and Welfare ? Evidence from SNAP," Policy Research Working Paper Series 10075, The World Bank.
    14. Navid Mojir & K. Sudhir, 2014. "A Model of Multi-pass Search: Price Search across Stores and Time," Cowles Foundation Discussion Papers 1942R2, Cowles Foundation for Research in Economics, Yale University, revised Feb 2020.
    15. Johannes Johnen, 2020. "Dynamic competition in deceptive markets," RAND Journal of Economics, RAND Corporation, vol. 51(2), pages 375-401, June.
    16. Baomin Dong & Guixia Guo & Frank Yong Wang, 2021. "A signalling model of loss leader pricing strategy," Australian Economic Papers, Wiley Blackwell, vol. 60(2), pages 289-307, June.

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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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