Reference

Zhijun Chen, and Patrick Rey, “Competitive Cross-Subsidization”, IDEI Working Paper, December 14, 2013.

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;

JEL codes

  • L11: Production, Pricing, and Market Structure • Size Distribution of Firms
  • L41: Monopolization • Horizontal Anticompetitive Practices

Research partnership

Orange