Competitive cross-subsidization

Zhijun Chen, Patrick Rey

Research output: Working paperWorking PaperOther

Abstract

Cross-subsidization arises naturally when firms with different comparative advantages 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
Original languageEnglish
Number of pages64
Publication statusPublished - 2016

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