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Competitive Cross-Subsidization

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  • Chen, Zhijun
  • Rey, Patrick

Abstract

This paper analyzes competitive pricing policies by multiproduct firms facing heterogeneous buying patterns. We show that cross-subsidization arises when firms have comparative advantages on different products but are equally efficient overall: Firms earn a profit from multi-stop shoppers by charging positive margins on their strong products but, as price competition for one-stop shoppers drives total margins down to zero, they price weaker products below cost. Banning below-cost pricing leads to higher profits and higher prices for one-stop shoppers, and may reduce consumer surplus as well as total social welfare.

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Bibliographic Info

Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 13-450.

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Date of creation: 14 Dec 2013
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Handle: RePEc:tse:wpaper:27777

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Keywords: Bertrand competition; cross-subsidization; buying patterns; one-stop and multi-stop shopping;

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  1. DeGraba, Patrick, 2006. "The loss leader is a turkey: Targeted discounts from multi-product competitors," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 613-628, May.
  2. Zhijun Chen & Patrick Rey, 2012. "Loss Leading as an Exploitative Practice," American Economic Review, American Economic Association, vol. 102(7), pages 3462-82, December.
  3. Rao, P. M. & Klein, Joseph A., 1992. "Antitrust issues concerning R&D cross-subsidization : A case study of US telecommunications," Telecommunications Policy, Elsevier, vol. 16(5), pages 415-424, July.
  4. Paul Klemperer & A. Jorge Padilla, 1997. "Do Firms' Product Lines Include Too Many Varieties?," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 472-488, Autumn.
  5. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July.
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