Competitive cross‐subsidization

Zhijun Chen and Patrick Rey

RAND Journal of Economics, 2019, vol. 50, issue 3, 645-665

Abstract: Cross‐subsidization arises naturally when firms with different comparative advantages compete for consumers with heterogeneous shopping patterns. Firms then face a form of co‐opetition, as they offer substitutes for one‐stop shoppers and complements for multi‐stop shoppers. When intense competition for one‐stop shoppers drives total prices down to cost, firms subsidize weak products with the profits made on strong products. Moreover, firms have incentives to seek comparative advantages on different products. Finally, banning below‐cost pricing increases firms' profits at the expense of one‐stop shoppers, which calls for a cautious use of below‐cost pricing regulations in competitive markets.

Date: 2019
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Citations: View citations in EconPapers (5)

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https://doi.org/10.1111/1756-2171.12293

Related works:
Working Paper: Competitive Cross-Subsidization (2018)
Working Paper: Competitive Cross-Subsidization (2016)
Working Paper: Competitive Cross-Subsidization (2013)
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