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The effects of banning loss-leader pricing in grocery retailing markets
(joint with Jorge Florez, Banco de la Republica)
Half of the states of the U.S. ban loss-leader pricing because it is considered predatory. Recent theoretical evidence challenges this view, suggesting that loss-leading may arise as a result of a discrimination of consumers with different shopping costs. We examine the effects of banning loss-leader pricing in grocery retailing markets on supermarket pricing. To this end, we use scanner data on supermarket sales in the United States and carry out two empirical exercises. First, we exploit an exogenous shock in the below-cost selling law in Wisconsin between 2009 and 2010 to identify the causal effect on prices on milk. Our results suggest that prices increase as a result of the ban of below-cost selling. Second, we estimate a structural model of demand and supply of multiple products allowing for complementarities across products. The main challenge that is common in the estimation of demand models in this type of setting is a high-dimensional choice set. We propose a novel solution to this challenge and provide evidence of its effectiveness based on Monte Carlo simulations. Using our demand estimation approach, we find negative margins consistent with competitive cross-subsidization across products within a retailer chain. Our counterfactual results suggest that banning below-cost pricing rises equilibrium prices.