Abstract

Co authored with Zhijun Chen. Cross-subsidisation 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 subsidise weak products with the profit made on strong products. Firms have moreover 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.