Price dispersion and loss-leader pricing: Evidence from the online book industry

Xinxin Li, Bin Gu, Hongju Liu

Research output: Contribution to journalArticle

22 Scopus citations

Abstract

In this paper, we develop a theoretical model to analyze the pricing strategies of competing retailers with asymmetric cross-selling capabilities when product demand changes. Our results suggest that retailers with better opportunities for cross-selling have higher incentives to adopt loss-leader pricing on high-demand products than retailers with low cross-selling capabilities. As a result, price dispersion of a product across retailers rises when its demand increases. The predictions of our model are consistent with the empirical evidence from the online book retailing industry. Using product breadth as a proxy for cross-selling capability, we find that retailers with high cross-selling capabilities reduce prices on best sellers more aggressively than retailers with low cross-selling capabilities. As a result, price dispersion increases when a book makes it to the best-seller list, and the increase is mainly driven by the difference in pricing behavior between retailers with different cross-selling capabilities. Our empirical results are robust against a number of alternative explanations.

Original languageEnglish (US)
Pages (from-to)1290-1308
Number of pages19
JournalManagement Science
Volume59
Issue number6
DOIs
StatePublished - Jun 1 2013

Keywords

  • Competitive pricing
  • Cross-selling capability
  • Loss-leader strategy
  • Price dispersion

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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