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A rationale for repealing the 1987 Groceries Order

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  • Ciara Whelan
  • Patrick P. Walsh

Abstract

A ban on pricing below cost was implemented under the 1987 Groceries Order based on the premise that loss leading used in multi-product retail pricing distorts competition and exploits consumers in the short run, while driving a more concentrated structure and reducing welfare in the long run. Loss leading is examined for multi-product retailers selling in imperfectly competitive market niches with imperfect consumer information. We develop a theoretical argument in a simple two-stage framework that illustrates how loss leading on a subset of products is an equilibrium outcome of price competition that leaves overall welfare equal to that observed under laissez faire.

Suggested Citation

  • Ciara Whelan & Patrick P. Walsh, 1999. "A rationale for repealing the 1987 Groceries Order," Open Access publications 10197/127, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:oapubs:10197/127
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    File URL: http://hdl.handle.net/10197/127
    File Function: Open Access version, 1999
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    References listed on IDEAS

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    1. Bliss, Christopher, 1988. "A Theory of Retail Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 375-391, June.
    2. repec:bla:jindec:v:47:y:1999:i:3:p:325-43 is not listed on IDEAS
    3. Shepard, Andrea, 1991. "Price Discrimination and Retail Configuration," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 30-53, February.
    4. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    5. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-683, August.
    6. Severin Borenstein, 1991. "Selling Costs and Switching Costs: Explaining Retail Gasoline Margins," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 354-369, Autumn.
    7. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-250, March.
    8. Giulietti, M., 1995. "Multiproduct Firms' Pricing Behavior in the Italian Grocery Trade," Discussion Papers 9509, University of Exeter, Department of Economics.
    9. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn.
    10. Katz, Michael L, 1984. "Price Discrimination and Monopolistic Competition," Econometrica, Econometric Society, vol. 52(6), pages 1453-1471, November.
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    Cited by:

    1. Patrick Paul Walsh & Ciara Whelan, 2002. "Portfolio Effects and Firm Size Distribution - Carbonated Soft Drinks," The Economic and Social Review, Economic and Social Studies, vol. 33(1), pages 43-54.
    2. Patrick Paul Walsh & Ciara Whelan, 2001. "Product Differentiation and Firm Size Distribution - An Application to Carbonated Soft Drinks," Working Papers 200113, School of Economics, University College Dublin.
    3. Ciara Whelan, 2003. "Is equating market share to market power a sound economic principle?," Open Access publications 10197/136, School of Economics, University College Dublin.

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