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Price Dispersion and Loss-Leader Pricing: Evidence from the Online Book Industry

Author

Listed:
  • Xinxin Li

    (Department of Operations and Information Management, School of Business, University of Connecticut, Storrs, Connecticut 06269)

  • Bin Gu

    (Department of Information Systems, W. P. Carey School of Business, Arizona State University, Tempe, Arizona 85287)

  • Hongju Liu

    (Department of Marketing, School of Business, University of Connecticut, Storrs, Connecticut 06269)

Abstract

In this paper, we develop a theoretical model to analyze the pricing strategies of competing retailers with asymmetric cross-selling capabilities when product demand changes. Our results suggest that retailers with better opportunities for cross-selling have higher incentives to adopt loss-leader pricing on high-demand products than retailers with low cross-selling capabilities. As a result, price dispersion of a product across retailers rises when its demand increases. The predictions of our model are consistent with the empirical evidence from the online book retailing industry. Using product breadth as a proxy for cross-selling capability, we find that retailers with high cross-selling capabilities reduce prices on best sellers more aggressively than retailers with low cross-selling capabilities. As a result, price dispersion increases when a book makes it to the best-seller list, and the increase is mainly driven by the difference in pricing behavior between retailers with different cross-selling capabilities. Our empirical results are robust against a number of alternative explanations. This paper was accepted by Sandra Slaughter, information systems.

Suggested Citation

  • Xinxin Li & Bin Gu & Hongju Liu, 2013. "Price Dispersion and Loss-Leader Pricing: Evidence from the Online Book Industry," Management Science, INFORMS, vol. 59(6), pages 1290-1308, June.
    • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:6:p:1290-1308
    DOI: 10.1287/mnsc.1120.1642
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    References listed on IDEAS

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    11. Leung Tin Cheuk & Tsang Kwok Ping & Tsui Kevin K., 2020. "Why Are Inferior Seats “Underpriced”? Evidence from the English Premier League," Man and the Economy, De Gruyter, vol. 7(1), pages 1-26, June.
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