Research
Research Interest
Industrial Organization, Microeconomics
Working Paper
Chen and Rey (2019, Rand Journal of Economics) argue that multiproduct firms in a competitive market adopt a pricing strategy, so-called competitive cross-subsidization: the loss from the below-cost pricing of weak products is entirely offset by the profit from the above-cost pricing of strong products. This paper studies whether or not competitive cross-subsidization is robust when one firm discontinues its weak product lines which generate losses, instead of cross-subsidizing it. We show that there exists an equilibrium in which one firm discontinues its weak product and the opponent uses the monopoly profit from that market to cross-subsidize the other product. Moreover, this equilibrium Pareto dominates the competitive cross-subsidization equilibrium with no discontinuation. Cross-subsidization is robust but it no longer arises in the competitive market: it is practiced by the firm that monopolizes the market from which its opponent withdraws.