Abstract
While cross-subsidization is understood theoretically as involving the sustainability of a cost allocation scheme, it is invoked in regulatory policy contexts, such as the divestiture of AT&T, where costs of serving unregulated markets may be borne by ratepayers of regulated monopolies. We analyze two cross-subsidization tactics—cost misallocation and distorted technological choice — under a spectrum of regulatory cost allocation policies. These tactics lead to higher prices in regulated markets and inefficient production in unregulated markets. Welfare effects are discussed; we conclude with observations on strategic behavior and regulatory policy.
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Brennan, T.J. Cross-subsidization and cost misallocation by regulated monopolists. J Regul Econ 2, 37–51 (1990). https://doi.org/10.1007/BF00139361
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DOI: https://doi.org/10.1007/BF00139361