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 language | English (US) |
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Pages (from-to) | 1290-1308 |
Number of pages | 19 |
Journal | Management Science |
Volume | 59 |
Issue number | 6 |
DOIs | |
State | Published - Jun 2013 |
Keywords
- Competitive pricing
- Cross-selling capability
- Loss-leader strategy
- Price dispersion
ASJC Scopus subject areas
- Strategy and Management
- Management Science and Operations Research