Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Monday, June 21, 2021

Loss Leading with Salient Thinkers

Loss Leading with Salient Thinkers

 

Roman Inderst

Goethe University Frankfurt

Martin Obradovits

Goethe University Frankfurt

Abstract

In various countries, competition laws restrict retailers’ freedom to sell their pro-ducts below cost. A common rationale, shared by policymakers, consumer interestgroups and brand manufacturers alike, is that such “loss leading” of products wouldultimately 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 whenconsumers are salient thinkers, putting too much weight on certain product attribu-tes. But we also show how a prohibition of loss leading can backfire, as it may makeit even less attractive for retailers to stock high-quality products, decreasing bothaggregate welfare and consumer surplus.

https://lawprofessors.typepad.com/antitrustprof_blog/2021/06/loss-leading-with-salient-thinkers.html

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