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Competitive cross‐subsidization

Author

Listed:
  • Zhijun Chen
  • Patrick Rey

Abstract

Cross‐subsidization arises naturally when firms with different comparative advantages compete for consumers with heterogeneous shopping patterns. Firms then face a form of co‐opetition, as they offer substitutes for one‐stop shoppers and complements for multi‐stop shoppers. When intense competition for one‐stop shoppers drives total prices down to cost, firms subsidize weak products with the profits made on strong products. Moreover, firms have incentives to seek comparative advantages on different products. Finally, banning below‐cost pricing increases firms' profits at the expense of one‐stop shoppers, which calls for a cautious use of below‐cost pricing regulations in competitive markets.

Suggested Citation

  • Zhijun Chen & Patrick Rey, 2019. "Competitive cross‐subsidization," RAND Journal of Economics, RAND Corporation, vol. 50(3), pages 645-665, September.
    • Handle: RePEc:bla:randje:v:50:y:2019:i:3:p:645-665
    DOI: 10.1111/1756-2171.12293
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    Cited by:

    1. Lowing, David & Munich, Léa & Techer, Kevin, 2025. "Allocating the common costs of a public service operator: An axiomatic approach," International Review of Law and Economics, Elsevier, vol. 81(C).
    2. Yuta KITTAKA, 2018. "Multiproduct Firms, Consumer Search, and Demand Heterogeneity," ISER Discussion Paper 1024r, Institute of Social and Economic Research, The University of Osaka, revised Oct 2019.
    3. Andrea Attar & Thomas Mariotti & François Salanié, 2022. "Regulating Insurance Markets: Multiple Contracting And Adverse Selection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(3), pages 981-1020, August.
    4. Stephane Caprice & Shiva Shekhar, 2019. "Negative market value and loss leading," Economics Bulletin, AccessEcon, vol. 39(1), pages 94-103.
    5. Caprice, Stéphane & Shekhar, Shiva, 2017. "Negative consumer value and loss leading," DICE Discussion Papers 271, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    6. Zhou, Wei & Zhang, Keang & Zhang, Ying & Duan, Yunlong, 2021. "Operation strategies with respect to insurance subsidy optimization for online retailers dealing with large items," International Journal of Production Economics, Elsevier, vol. 232(C).
    7. Zhou, Xiaoyang & Chen, Kexin & Wen, Haoyu & Lin, Jun & Zhang, Kai & Tian, Xin & Wang, Shouyang & Lev, Benjamin, 2021. "Integration of third-party platforms: Does it really hurt them?," International Journal of Production Economics, Elsevier, vol. 234(C).
    8. Patrick Rey & Yossi Spiegel & Konrad Stahl, 2025. "A Dynamic Model of Predation," RAND Journal of Economics, RAND Corporation, vol. 56(4), pages 738-755, December.
    9. Jorge Florez-Acosta & Daniel Herrera-Araujo, 2017. "Multiproduct retailing and buyer power: The effects of product delisting on consumer shopping behavior," Working Papers halshs-01467435, HAL.

    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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