Faculty of Economics and Business Administration Publications Database

Loss leading with salient thinkers

Obradovits, Martin
Volume: 51
Number: 1
Pages: 260 - 278
Month: 03
ISSN-Print: 1756-2171
Link External Source: Online Version
Year: 2020

In various countries, competition laws restrict retailers' freedom to sell their products below cost. A common rationale, shared by policymakers, consumer interest groups and brand manufacturers alike, is that such “loss leading” of products would ultimately lead to a race‐to‐the‐bottom in product quality. Building on Varian's (1980) model of sales, we provide a foundation for this critique, though only when consumers are salient thinkers, putting too much weight on certain product attributes. But we also show how a prohibition of loss leading can backfire, as it may make it even less attractive for retailers to stock high‐quality products, decreasing both aggregate welfare and consumer surplus.