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Loss leader or low margin leader? Advertising and the degree of product differentiation

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  • Simbanegavi, Witness

Abstract

This paper attempts to isolate the conditions that give rise to loss leader pricing. I show that for sufficiently low distance between firms, the advertised good is priced below cost irrespective of whether firms advertise the same or different products. Instead, if products are sufficiently differentiated, loss leader pricing may result only if firms advertise the low reservation value product, otherwise the advertised good is a low margin leader. Thus, whether the advertised good is a loss leader or a low margin leader is primarily a function of the extent of differentiation between competing firms.

Suggested Citation

  • Simbanegavi, Witness, 2008. "Loss leader or low margin leader? Advertising and the degree of product differentiation," MPRA Paper 9694, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:9694
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    References listed on IDEAS

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    1. Joel Waldfogel & Jeffrey Milyo, 1999. "The Effect of Price Advertising on Prices: Evidence in the Wake of 44 Liquormart," American Economic Review, American Economic Association, vol. 89(5), pages 1081-1096, December.
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    Cited by:

    1. Karine Lamiraud & Pierre Stadelmann, 2020. "Switching costs in competitive health insurance markets: The role of insurers' pricing strategies," Health Economics, John Wiley & Sons, Ltd., vol. 29(9), pages 992-1012, September.

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    More about this item

    Keywords

    Informative advertising; loss leader; low margin leader; product differentiation;
    All these keywords.

    JEL classification:

    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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