Loss Leader Pricing and Rain Check Policy

James D. Hess and Eitan Gerstner

Loss leader pricing and rain check policies are common in retail markets, yet research on these topics is surprisingly scarce. In this paper, we study the effects of leader pricing and rain check policy on stores' profits and market outcomes. Suppose stores can accurately predict demand. Might they still run out of stock? We investigate whether such a result is plausible when stores can offer rain checks. The paper also helps resolve an issue that has recently attracted much attention: Should the FTC repeal its rule prohibiting stock outs of advertised sale items?

(pricing, loss leaders, rain checks, featuring)