Simbanegavi, Witness (2008): Loss leader or low margin leader? Advertising and the degree of product differentiation.
Download (177Kb) | Preview
This paper attempts to isolate the conditions that give rise to loss leader pricing. I show that for sufficiently low distance between firms, the advertised good is priced below cost irrespective of whether firms advertise the same or different products. Instead, if products are sufficiently differentiated, loss leader pricing may result only if firms advertise the low reservation value product, otherwise the advertised good is a low margin leader. Thus, whether the advertised good is a loss leader or a low margin leader is primarily a function of the extent of differentiation between competing firms.
|Item Type:||MPRA Paper|
|Original Title:||Loss leader or low margin leader? Advertising and the degree of product differentiation|
|Keywords:||Informative advertising, loss leader, low margin leader, product differentiation|
|Subjects:||M - Business Administration and Business Economics; Marketing; Accounting > M3 - Marketing and Advertising
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance
|Depositing User:||Witness Simbanegavi|
|Date Deposited:||24. Jul 2008 10:39|
|Last Modified:||12. Feb 2013 16:59|
Bagwell, Kyle (2005), "The Economic Analysis of Advertising", Forthcoming; Handbook of Industrial Organization.
Bagwell, Kyle and Ramey, Garey (1994), "Coordination Economies, Advertising, and Search Behavior in Retail markets", American Economic Review, 84, 498-517.
Bagwell, Kyle and Ramey, Garey (1994), "Advertising and Coordination", Review of Economic Studies, 61, 153-171.
Benham, Lee (1972), "The Effect of Advertising on the Price of Eyeglasses", Journal of Law and Economics, 15, 337-352.
Butters, Gerard R. (1977), "Equilibrium Distributions of Sales and Advertising Prices", Review of Economic Studies, 44, 465-491.
DeGraba, Patrick, (2006), "The loss leader is a turkey: Targeted discounts from multi-product competitors", International Journal of Industrial Economics, 24, 613-628.
Ellison, Glenn (2005) "A Model of Add-on Pricing", Quarterly Journal of Economics, 120, 585-638.
Grossman, Gene M. and Shapiro, Carl (1984), "Informative Advertising with Differentiated Products", Review of Economic Studies, 51, 63-81.
Hess, James. D and Eitan Gerstner (1987), "Loss leader Pricing and Rain Check Policy", Marketing Science, 6, 358-374.
Lal, Rajiv and Matutes, Carmen (1994), "Retail Pricing and Advertising Strategies", Journal of Business, 67, 345-370.
Milyo, Jeffrey and Waldfogel, Joel (1999), "The Effect of Price Advertising on Prices: Evidence in the Wake of 44 Liquormart", American Economic Review, 89, 1081-1096.
Simbanegavi, Witness (2005), "Equilibrium Pricing When Only Some Goods are Advertised", mimeo.
Soberman, David A. (2004), "Research Note: Additional Learning and Implications on the Role of Informative Advertising", Management Science, 50, 1744-1750.
Tirole, Jean (1988), "The Theory of Industrial Organization", MIT Press, Cambridge, Massachusetts.
Walters, Rockney G. and MacKenzie, Scott B. (1988), "A Structural Equation Analysis of the Impact of Price Promotions on Store Performance", Journal of Marketing Research, 25, 51-63.