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Temporary price reductions or �sales� have become increasingly important in the evolution of the price level. We present a model of repeated price competition to illustrate how entry causes incumbents to alternate between high and low prices. Using a six-year panel of weekly observations from a grocery chain, we find that individual stores employ more sales as the distance to Wal-Mart falls. Moreover, the increase in the frequency of sales was concentrated on the most popular products, suggesting the use of a loss-leader strategy.
