Unplanned Purchases and Retail Competition
American Economic Review · 2017 · Volume 107 · Issue 3
Abstract
I propose a framework in which asymmetric multiproduct retailers compete for one-stop shoppers who have biased beliefs about their future purchase probabilities (and so make unplanned purchases). One firm carries a full portfolio of products while the other carries an incomplete but endogenous one. Using this framework, I examine the phenomenon of loss leading, the optimal product portfolio of the smaller firm, and the effects of banning loss leading. Among other results, I show that there is a nonpredatory (and possibly procompetitive) justification for the observation that such larger firms may charge below cost on the core product lines of their smaller rivals.
Keywords
Consumer Economics: Theory, Firm Behavior: Theory, Search, Learning, Information and Knowledge, Communication, Belief, Unawareness, Oligopoly and Other Imperfect Markets, Firm Performance: Size, Diversification, and Scope, Mining, Extraction, and Refining: Hydrocarbon Fuels, Retail and Wholesale Trade, e-Commerce
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