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Competitive Cross-Subsidization

  • Chen, Zhijun
  • Rey, Patrick

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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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: 29 Apr 2016
Handle: RePEc:tse:wpaper:27777
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  1. Faulhaber, Gerald R, 1975. "Cross-Subsidization: Pricing in Public Enterprises," American Economic Review, American Economic Association, vol. 65(5), pages 966-77, December.
  2. Rey, Patrick & Chen, Zhijun, 2010. "Loss Leading as an Exploitative Practice," TSE Working Papers 10-218, Toulouse School of Economics (TSE), revised Dec 2011.
  3. 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.
  4. repec:hrv:faseco:4685158 is not listed on IDEAS
  5. John Vickers & Mark Armstrong, 2006. "Competitive Nonlinear Pricing and Bundling," Economics Series Working Papers 281, University of Oxford, Department of Economics.
  6. 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.
  7. 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.
  8. Weinstein, Jonathan & Ambrus, Attila, 2008. "Price Dispersion and Loss Leaders," Scholarly Articles 4589708, Harvard University Department of Economics.
  9. 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.
  10. 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.
  11. Klemperer, Paul, 1992. "Equilibrium Product Lines: Competing Head-to-Head May Be Less Competitive," American Economic Review, American Economic Association, vol. 82(4), pages 740-55, September.
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