Retail Pricing and Advertising Strategies

TLDR

Retailers compete for demand across multiple goods by employing pricing and advertising strategies. The study shows that firms advertise prices below marginal cost to attract shoppers and profit from other purchases, maintain broad assortments even when some items lose money, and target low reservation‑price goods as loss‑leaders. © 1994 University of Chicago Press.

Abstract

The authors study pricing and advertising strategies of retailers competing for the demand of an assortment of goods. In a model where uninformed rational consumers decide where to buy each product, they find that firms advertise prices below marginal cost to attract consumers into the store and profit from other goods that consumers plan to buy at the store. Incorporating product-line decisions indicates that firms do not restrict their product assortment even when they make a loss on one of the goods. Finally, products with lower reservation prices are shown to be more natural candidates for loss-leader pricing. Copyright 1994 by University of Chicago Press.