Working paper

Competitive Cross-Subsidization

Zhijun Chen, and Patrick Rey

Abstract

Cross-subsidization arises naturally when firms with different 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 firms subsidize weak products with the profit made on strong products. While firms and consumers would benefit from cooperation limiting cross- subsidization (e.g., through price caps), banning below-cost pricing instead increases firms’ profits 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

See also

Published in

TSE Working Paper, n. 13-450, December 14, 2013, revised December 2016