The optimality of loss leading in multi-product retail pricing - a rationale for repealing the 1987 Groceries Order in Ireland

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Title: The optimality of loss leading in multi-product retail pricing - a rationale for repealing the 1987 Groceries Order in Ireland
Authors: Walsh, Patrick P.
Whelan, Ciara
Permanent link: http://hdl.handle.net/10197/1003
Date: 1996
Abstract: The Competition Act in 1991 repealed all legally binding Orders in Ireland except for the 1987 Groceries Order. Article 11 of this Order categorically prohibits retail pricing in the grocery sector below the net invoice price of the wholesaler or manufacturer. The vast range of products retailed through outlets and the convenience of 'one stop' shopping result in imperfect costumer information and consumer switching costs. This enables retailers to price below cost on Known-Value-Items (KVIs) to attract customer entry and subsequently impose higher price-cost mark-ups on other non-KVIs, a practice defined as loss leading. This practice was deemed to be essentially predatory in effect by the Fair Trade Commission (FTC) in 1987. In this paper we examine the potential legitimacy of below cost selling by modeling the optimal pricing of a multi-product retailer in a game-theoretic framework. We show that loss leading is an equilibrium outcome that is socially desirable in an imperfectly competitive market. We also model the repercussions of introducing the ban for equilibrium profits, corresponding services and concentration levels in the market. Our analysis suggests that a removal of the ban in favour of the 1991 Competition Act would be welfare improving.
Type of material: Working Paper
Publisher: Trinity College Dublin. Department of Economics
Copyright (published version): Trinity College Dublin, Department of Economics 1996
Subject LCSH: Restraint of trade--Ireland
Groceries--Prices--Ireland
Loss leaders--Ireland
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Politics and International Relations Research Collection
Geary Institute Research Collection

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