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Negative market value and loss leading

Author

Listed:
  • Stephane Caprice

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)

  • Shiva Shekhar

    (Heinrich Heine Universität Düsseldorf = Heinrich Heine University [Düsseldorf])

Abstract

Multi-product retailers competing with smaller retailers can exercise market power by pricing below cost products also offered by smaller rivals. Loss-leading is not a predatory strategy: rather pro-competitive justifications are invoked. Unlike standard textbook models, we show that positive market value, that is, consumer valuation larger than production cost, is not required in this line of research examining the phenomenon of loss-leading. Multi-product retailers can supply products offering negative market value. We use this insight to revisit some classic issues in vertical relations.

Suggested Citation

  • Stephane Caprice & Shiva Shekhar, 2019. "Negative market value and loss leading," Post-Print hal-02178451, HAL.
    • Handle: RePEc:hal:journl:hal-02178451
    as

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    References listed on IDEAS

    as
    1. Zhijun Chen & Patrick Rey, 2012. "Loss Leading as an Exploitative Practice," American Economic Review, American Economic Association, vol. 102(7), pages 3462-3482, December.
    2. Zhijun Chen & Patrick Rey, 2019. "Competitive cross‐subsidization," RAND Journal of Economics, RAND Corporation, vol. 50(3), pages 645-665, September.
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    5. Katz, Michael L, 1987. "The Welfare Effects of Third-Degree Price Discrimination in," American Economic Review, American Economic Association, vol. 77(1), pages 154-167, March.
    6. Justin P. Johnson, 2017. "Unplanned Purchases and Retail Competition," American Economic Review, American Economic Association, vol. 107(3), pages 931-965, March.
    7. Scheffman, David T & Spiller, Pablo T, 1992. "Buyer's Strategies, Entry Barriers, and Competition," Economic Inquiry, Western Economic Association International, vol. 30(3), pages 418-436, July.
    8. Stéphane Caprice, 2006. "Multilateral Vertical Contracting with an Alternative Supply: The Welfare Effects of a Ban on Price Discrimination," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 28(1), pages 63-80, February.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    multi-product retailers; loss-leading; negative market value;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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