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Competitive Cross-Subsidization

Author

Listed:
  • Chen, Zhijun
  • Rey, Patrick

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.

Suggested Citation

  • Chen, Zhijun & Rey, Patrick, 2013. "Competitive Cross-Subsidization," TSE Working Papers 13-450, Toulouse School of Economics (TSE), revised Nov 2018.
    • Handle: RePEc:tse:wpaper:27777
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    References listed on IDEAS

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    Citations

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    Cited by:

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    2. 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).
    3. Caprice, Stéphane & Shekhar, Shiva, 2017. "Negative consumer value and loss leading," TSE Working Papers 17-835, Toulouse School of Economics (TSE).
    4. 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).
    5. 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.
    6. 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.
    7. 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.
    8. 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).
    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.

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    Keywords

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    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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