Loss-Leader Pricing and Upgrades

17 Pages Posted: 10 Jan 2013

See all articles by Younghwan In

Younghwan In

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Julian Wright

National University of Singapore (NUS) - Department of Economics

Date Written: December 1, 2012

Abstract

A new theory of loss-leader pricing is provided in which firms offer low advertised prices for certain goods to signal that their other unadvertised (substitute) goods are not priced too high. The theory applies to the pricing of upgrades, in which the basic version of the good is advertised, with a particularly low price, so as to signal that the price of the upgraded version, which is not advertised, is not too high. The results contrast with most existing loss-leader theories in that firms make a loss on some consumers (who buy the basic version of the good) and a profit on others (who buy the upgrade). The theory provides an application of the framework of In and Wright (2012) in which private choices (rather than exogenous types) are signaled.

Keywords: signaling, loss leader, advertising, upgrades

JEL Classification: D82, L11, M37

Suggested Citation

In, Younghwan and Wright, Julian, Loss-Leader Pricing and Upgrades (December 1, 2012). KAIST College of Business Working Paper Series No. 2012-017, Available at SSRN: https://ssrn.com/abstract=2198278 or http://dx.doi.org/10.2139/ssrn.2198278

Younghwan In (Contact Author)

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

Julian Wright

National University of Singapore (NUS) - Department of Economics ( email )

AS2 Level 6, 1 Arts Link
Singapore 117570
Singapore
6568743941 (Phone)
6567752646 (Fax)

HOME PAGE: http://profile.nus.edu.sg/fass/ecsjkdw/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
88
Abstract Views
874
Rank
520,319
PlumX Metrics