Competitive Cross-Subsidization

Zhijun Chen and Patrick Rey

IDEI Working Papers from Institut d'Économie Industrielle (IDEI), Toulouse

Abstract: This paper analyzes competitive pricing policies by multiproduct firms facing heterogeneous buying patterns. We show that cross-subsidization arises when firms have comparative advantages on different products but are equally efficient overall: Firms earn a profit from multi-stop shoppers by charging positive margins on their strong products but, as price competition for one-stop shoppers drives total margins down to zero, they price weaker products below cost. Banning below-cost pricing leads to higher profits and higher prices for one-stop shoppers, and may reduce consumer surplus as well as total social welfare.

Keywords: Bertrand competition; cross-subsidization; buying patterns; one-stop and multi-stop shopping (search for similar items in EconPapers)
JEL-codes: L11 L41 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
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Related works:
Journal Article: Competitive cross‐subsidization (2019)
Working Paper: Competitive Cross-Subsidization (2018)
Working Paper: Competitive Cross-Subsidization (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ide:wpaper:27776

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