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Competitive Cross-Subsidization

Listed author(s):
  • Chen, Zhijun
  • Rey, Patrick

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.

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File URL: https://www.tse-fr.eu/sites/default/files/TSE/documents/doc/by/rey/competitive.pdf
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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
Date of revision: Dec 2016
Handle: RePEc:tse:wpaper:27777
Contact details of provider: Phone: (+33) 5 61 12 86 23
Web page: http://www.tse-fr.eu/

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  1. Gijsbrechts, E. & Campo, K. & Nisol, P., 2005. "Beyond Promotion-Based Store Switching : Antecedents and Consequences of Systematic Multiple-Store Shopping," Discussion Paper 2005-76, Tilburg University, Center for Economic Research.
  2. Baye, Michael R. & Kovenock, Dan & de Vries, Casper G., 1992. "It takes two to tango: Equilibria in a model of sales," Games and Economic Behavior, Elsevier, vol. 4(4), pages 493-510, October.
  3. Berg, Sanford V. & Weisman, Dennis L., 1992. "A guide to cross- subsidization and price predation : Ten myths," Telecommunications Policy, Elsevier, vol. 16(6), pages 447-459, August.
  4. Rey, Patrick & Tirole, Jean, 2013. "Price Caps as Welfare-Enhancing Coopetition," TSE Working Papers 13-439, Toulouse School of Economics (TSE), revised Apr 2017.
  5. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-370, July.
  6. Zhijun Chen & Patrick Rey, 2012. "Loss Leading as an Exploitative Practice," American Economic Review, American Economic Association, vol. 102(7), pages 3462-3482, December.
  7. Mark Armstrong & John Vickers, 2010. "Competitive Non-linear Pricing and Bundling," Review of Economic Studies, Oxford University Press, vol. 77(1), pages 30-60.
  8. Faulhaber, Gerald R, 1975. "Cross-Subsidization: Pricing in Public Enterprises," American Economic Review, American Economic Association, vol. 65(5), pages 966-977, December.
  9. Rey, Patrick & Tirole, Jean, 2013. "Cooperation vs. Collusion: How Essentiality Shapes Co-opetition," IDEI Working Papers 801, Institut d'Économie Industrielle (IDEI), Toulouse.
  10. 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.
  11. 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.
  12. Weinstein, Jonathan & Ambrus, Attila, 2008. "Price dispersion and loss leaders," Theoretical Economics, Econometric Society, vol. 3(4), December.
  13. repec:hrv:faseco:4685158 is not listed on IDEAS
  14. Paul R. Messinger & Chakravarthi Narasimhan, 1997. "A Model of Retail Formats Based on Consumers' Economizing on Shopping Time," Marketing Science, INFORMS, vol. 16(1), pages 1-23.
  15. Klemperer, Paul, 1992. "Equilibrium Product Lines: Competing Head-to-Head May Be Less Competitive," American Economic Review, American Economic Association, vol. 82(4), pages 740-755, September.
  16. 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.
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