Loss Leading and Price Intervention in Multiproduct Retailing: Welfare Outcomes in a Second-Best World

We examine whether loss leading pricing strategies in multiproduct retailing should be a target of antitrust policy. Loss leading is modeled in the presence of imperfect competition and consumer information in a stage game framework. We show that price constraints, used as a second-best instrument, targeted at loss leading can interact with market imperfections to create distortions that can only reduce welfare ex post. Imperfections in the market are moving targets in relation to intervention. Only first-best policy instruments aimed at factors creating endogenous price imperfections can move welfare closer to the bliss point. © 1999 by Elsevier Science Inc.