| By: |
Inderst, Roman;
Obradovits, Martin |
| Abstract: |
Manufacturers frequently resist heavy discounting of their products by
retailers, especially when they are used as so-called loss leaders. Since low
prices should increase demand and manufacturers could simply refuse to fund
deep price promotions, such resistance is puzzling at first sight. We explain
this phenomenon in a model in which price promotions cause shoppers to
potentially reassess the relative importance of quality and price, as they
evaluate these attributes relative to a market-wide reference point. With deep
discounting, quality can become relatively less important, eroding brand value
and the bargaining position of brand manufacturers. This reduces their profits
and potentially even leads to a delisting of their products. Linking price
promotions to increased one-stop shopping and more intense retail competition,
our theory also contributes to the explanation of the rise of store brands. |
| Keywords: |
loss leading,relative thinking,reference-depending preferences,product positioning,vertical differentiation,price competition,price promotion |
| JEL: |
D11 D22 D43 L11 L15 |
| Date: |
2021 |
| URL: |
http://d.repec.org/n?u=RePEc:zbw:esprep:253667&r= |