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 rmspro ts at the expense of one-stop shoppers; this calls for a cautious use of below-cost pricing regulations in competitive markets.
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|Date of revision:||29 Apr 2016|
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