Reference

Zhijun Chen, and Patrick Rey, Competitive Cross-Subsidization, TSE Working Paper, n. 13-450, December 14, 2013, revised April 29, 2016.

Abstract

Cross-subsidization arises naturally when …rms with di¤erent comparative ad- vantages compete for consumers with diverse shopping patterns. Firms then face a form of co-opetition, being substitutes for one-stop shoppers and complements for multi-stop shoppers. Competition for one-stop shoppers then drives total prices down to cost, but …rms subsidize weak products with the pro…t made on strong products. While …rms and consumers would bene…t from cooperation limiting cross- subsidization (e.g., through price caps), banning below-cost pricing instead increases …rms’pro…ts at the expense of one-stop shoppers; this calls for a cautious use of below-cost pricing regulations in competitive markets.

Keywords

cross-subsidization; shopping patterns; multiproduct competition; co-opetition;

JEL codes

  • L11: Production, Pricing, and Market Structure • Size Distribution of Firms
  • L41: Monopolization • Horizontal Anticompetitive Practices