Sales at a loss: who benefits?

vanessa von schlippenbach;

Pricing and selling strategies in the retail sector are hotly debated in policy circles. This article analyses the impact of sales below cost on the negotiation outcomes in intermediate goods markets. Assuming that consumers have a sufficiently strong preference for one-stop shopping, we model below-cost pricing as the result of a profit maximising cross-subsidisation strategy of a multi-product retailer. We find that below-cost pricing improves the supplier�s bargaining position vis-a`-vis the retailer. Correspondingly, the supplier of the loss-leader benefits from the retailer�s below-cost pricing strategy, though the retailer is better off under a ban of sales below cost. These results
disprove the often expressed fear that retailers use sales at a loss to squeeze wholesale prices.