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Loss leader or low margin leader? Advertising and the degree of product differentiation

20 September 2012
Publication Type: Working Paper
JEL Code: L13, L15, M37

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.

Series title: Working Paper 105
1 January 2008
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