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Rehabilitating Cherry-Picking

Authors:

Xavier Drèze

Publisher:

University of Chicago Dissertation
1995

Abstract:

Cherry-picking is traditionally seen as an undesirable side effect to loss leader pricing. Indeed, retailers use loss leader prices to attract customers into their stores, hoping that these consumers will also buy regular priced goods and that the profits generated on these sales will more than compensate for the loss incurred on the loss leader products. However, if consumers buy only the loss leader goods (i.e., cherry-pick), the loss leader strategy backfires and retailers lose money. Hence, cherry-picking is viewed as a parasitic behavior that should be prevented at all cost.

In this paper, we show, using both an economic model and supporting empirical evidence, that contrary to common wisdom, it is often in the best interest of retailers to encourage cherrypicking and avoid direct competition on promotions. By not competing with each other, retailers can afford to give shallow discounts (making promotions profitable) and still attract price conscious consumers. At the same time, by encouraging a fraction of the population to cherrypick, retailers increase promotion lifts (making promotions even more profitable). There are however situations in which retailers are forced to use loss leader pricing. When they do so, it is not to steal consumers away from competitors, but rather to prevent their core consumer segment from shopping at other stores. Retailers then fight each other head to head, in a classic prisoner's dilemma setting. This competition has no effect on store traffic and precludes cherry-picking.

In short, we show that (1) cherry-picking is not an undesirable behavior, but rather a behavior that can be taken advantage of for greater profit, (2) loss leader prices are not aimed at stealing consumers away from the competition, but are rather defensive moves to protect one’s consumer base, (3) cherry-picking and loss leader are mutually exclusive.