When a Loss is a Gain and When It’s Just a Loss: The Effect of Loss Leader Strategy in Online Marketplaces

This study examines the impact of loss leader strategy on the sales of core products in an online marketplace. We assess differential effects of loss leading products according to their associations with core products, and further examine moderating roles of peer reviews and product prices that serve as informational cues in online marketplaces. We collect a unique dataset containing information about individual-level transactions and product-specific characteristics. To deal with endogeneity issues in adopting the loss leader strategy for particular sub-markets, we conduct a difference-in-differences analysis in combination with propensity score matching at the sub-market level. Our results suggest that the introduction of loss leading product would be positively associated with the sales of core products only when they have non-substitutional relationships with the core products. Further, this study examines that such association can be strengthened/weakened by the informational cues. Interpretations and implications of the results are presented.