A Cross-Subsidy Classification Framework

Abstract

Cross-subsidization is a frequent topic in public debates and often stigmatized in the wake of deregulation. Public monopolies increasingly find themselves operating not only in regulated markets, but in non-regulated markets where they are accused of illegally using resources from the regulated market to stifle competition. Similar anticompetitive allegations can be made against private multiservice firms with market power. However, definitions of cross-subsidization are many and this affects the debate about the issue and possible strategic motives behind cross-subsidization, its possible consequences for competition, and measures that might be taken against it. This paper organizes definitions that regulators are likely to encounter into three types involving cost transfer, temporary loss or permanent loss. Based on these distinctions, a novel classification framework is developed according to underlying motivation and consequences for competition. The four cases arising from the framework are subsequently discussed in terms of relevancy for public and private firms, and consequences for competition and welfare.