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Retailer Market Power and Competition Policy

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Loss leader pricing in the EU

Loss leader pricing is an aggressive pricing approach where a store sells selected goods below cost in order to attract customers. According to the loss leader strategy, the customers make up for the losses on the highlighted product(s) with additional purchases of profitable goods.

Industrial Technologies

Employed by retail businesses, loss leader pricing lures customer traffic away from the businesses of retail competitors. Scrutinised for loss leader pricing, large national discount retailers in the EU defend this practice. Lawsuits alleging that some loss leader pricing strategies amount to illegal business practices have also increased, although plaintiffs have not always been victorious. Opponents of such pricing practices argue the strategy is basically predatory in nature. They say the strategy is designed to ultimately force competitors large and small out of business. The EU-funded research project 'Retailer market power and competition policy' (RETAIL) compared loss leading strategy in two groups. The first comprised large retailers and small retailers, and the second only large retailers. Between large and small retailers, loss leading appears to be an exploitative practice as opposed to an exclusionary one. In the second scenario, large retailers' return on investment is positive from multi-stop shoppers while fierce pricing competition threatens profit from one-stop shoppers. In summary, loss leading can hurt the smaller retailer and banning the strategy would improve social welfare in the large retailer versus small retailer situation. In markets where retailers are similar in size, banning below-cost pricing is not harmful. Project activities resulted in two working papers. The papers are titled 'Retailer Market Power' and 'Loss Leading and Cross-subsidization'. RETAIL findings are also published in the American Economic Review. Fit for policymaking decisions, project results provide a solid theoretical finding for the EU.

Keywords

Loss leader pricing, pricing, profitable goods, retail businesses, customer traffic, discount retailers, retailers, illegal business practices, market power, competition policy, loss leading, return on investment, social welfare, cross-subsidization

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