A Theory of Loss-Leaders: Making Money by Pricing Below Cost

@inproceedings{Balcan2007ATO,
  title={A Theory of Loss-Leaders: Making Money by Pricing Below Cost},
  author={Maria-Florina Balcan and Avrim Blum and T.-H. Hubert Chan and Mohammad Taghi Hajiaghayi},
  booktitle={WINE},
  year={2007}
}
We consider the problem of assigning prices to goods of fixed marginal cost in order to maximize revenue in the presence of single-minded customers. We focus in particular on the question of how pricing certain items below their marginal costs can lead to an improvement in overall profit, even when customers behave in a fully rational manner. We develop two frameworks for analyzing this issue that we call the discount and coupon models, and examine both fundamental “profitability gaps” (to what… CONTINUE READING
Highly Cited
This paper has 20 citations. REVIEW CITATIONS