Cross-Subsidization, Cost Allocation, and Tacit Coordination

Review of Accounting Studies, Vol. 2, No. 3

Posted: 9 Apr 1998

See all articles by John S. Hughes

John S. Hughes

University of California at Los Angeles

Jennifer L. Kao

Independent

Abstract

This paper considers the prospect that multi-product firms facing each other in separate markets might tacitly coordinate their production through strategic common service cost allocations and mutually benefit from such action as a consequence. Our analysis suggests that decentralization cum tacit coordination may be possible in equilibrium, with or without public disclosure of allocation choices. In turn, tacit coordination may contribute to explanations for multi-product firms' decisions to decentralize. The implications for trade oversight bodies are ambiguous. While tacit coordination results in an anti-competitive distortion toward monopolies, it also induces greater specialization which reduces the diseconomies of scope.

JEL Classification: L11, L12, L22

Suggested Citation

Hughes, John S. and Kao, Jennifer L., Cross-Subsidization, Cost Allocation, and Tacit Coordination. Review of Accounting Studies, Vol. 2, No. 3, Available at SSRN: https://ssrn.com/abstract=74897

John S. Hughes (Contact Author)

University of California at Los Angeles ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-794-9553 (Phone)
310-267-2193 (Fax)

Jennifer L. Kao

Independent

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