Continuous Cross Subsidies and Quantity Restrictions

22 Pages Posted: 2 Jan 2009

See all articles by T. Randolph Beard

T. Randolph Beard

Auburn University

Michael L. Stern

Auburn University; Phoenix Center for Advanced Legal & Economic Public Policy Studies

Abstract

This article provides a model of loss leader pricing and quantity restrictions for a competitive multiproduct industry when individual consumers have continuous (and independent) demands for the set of available goods. Utilizing a generalization of the model proposed by Bliss [1988], we demonstrate the importance of consumer heterogeneity for the existence of cross subsidies when there is complete information and individual consumers have smooth, downward sloping demands. Continuous cross subsidies arising from consumer heterogeneity are also shown to exist in Hotelling models. Our use of continuous rather than unit demands allows us to analyze issues related to welfare, which in turn exposes a strong incentive for the firm to place binding quantity restrictions on consumers. We also show how the presence of quantity restrictions can be used to distinguish between continuous cross subsidies arising from heterogeneous consumers versus those arising from classic demand complementarity with homogeneous agents.

Suggested Citation

Beard, T. Randolph and Stern, Michael L., Continuous Cross Subsidies and Quantity Restrictions. The Journal of Industrial Economics, Vol. 56, Issue 4, pp. 840-861, December 2008. Available at SSRN: https://ssrn.com/abstract=1319578 or http://dx.doi.org/10.1111/j.1467-6451.2008.00364.x

T. Randolph Beard (Contact Author)

Auburn University

415 West Magnolia Avenue
Auburn, AL 36849
United States

Michael L. Stern

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States

Phoenix Center for Advanced Legal & Economic Public Policy Studies

5335 Wisconsin Avenue, NW
Suite 440
Washington, DC 20015
United States

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