Impact of a loss leader strategy on supply chain pricing and stocking

This paper examines how a loss leader strategy influences a two-stage supply chain. A retailer can decide whether to maximize the expected profits from the sale of a specific item, or to maximize the total revenue from the customers induced by the loss leader item. A newsvendor approach determines the optimal retail price and order size. We show that both the supplier and the retailer are better off with the short-term loss leader effect, but the long run benefit is conditional. Also, loss leader competition between two retailers always benefits the supplier, but may undermine the retailers' performance.