The loss leader is a turkey: Targeted discounts from multi-product competitors

Abstract I show that multi-product firms can compete for their more profitable customers by setting lower margins on goods that are purchased primarily by them, effectively offering them discounts without offering these discounts to less profitable customers. This suggests a theory of multi-product pricing in which a good's profit margin is inversely related to the profitability of the customers who purchase it. This theory i) provides one explanation for firms offering lower prices to larger customers, and ii) suggests that loss leader pricing may allow firms to compete more vigorously for more profitable customers. This can explain why stores sell turkeys as loss leaders at Thanksgiving, but may not discount flowers on Mother's Day, or candy on Valentines Day.