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Loss leading with salient thinkers
Author(s) -
Inderst Roman,
Obradovits Martin
Publication year - 2020
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12312
Subject(s) - salient , consumer welfare , product (mathematics) , stock (firearms) , quality (philosophy) , deadweight loss , competition (biology) , business , foundation (evidence) , welfare , economic surplus , economics , marketing , law and economics , market economy , law , political science , mechanical engineering , ecology , philosophy , geometry , mathematics , epistemology , biology , engineering
Abstract 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.