DP10813 | Too Much Attention on Low Prices? Loss Leading in a Model of Sales with Salient Thinkers

Publication Date

06/09/2015

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Abstract

Loss leading is analyzed in a model of promotions (as in Varian 1980) with limited consumer attention: (i) Consumers only compare prices of a selected number of products and (ii) they may pay more attention either to price or quality, depending on the salience of the respective attributes. When consumers have standard preferences, which is our benchmark case, manufacturers benefit when one-stop shopping induces retailers to discount their products, as this expands demand. Results are strikingly different when consumers are salient thinkers. When one-stop shopping or retail competition increases the scope for loss leading, manufacturers' profits decline and there may be an inefficient substitution to lower-quality products. In particular, shoppers who compare products may end up with a choice that is strictly inferior to that of non-shoppers who are locked in to a (local) retailer. Our analysis has implications both for competition policy, as we analyze the implications of a ban on loss leading, and for marketing, as we also analyze how salience affects retailers' product and promotion strategies.