Cross subsidization


Cross subsidization

Cross subsidization is the practice of charging higher prices to one group of consumers in order to subsidize lower prices for another group. State trading enterprises with monopoly control over marketing agricultural exports are sometimes alleged to cross subsidize, but lack of transparency in their operations makes it difficult if not impossible to determine if that is the case.

Consider the example of going to dinner with 2 of your friends. Leo Lemes's meal costs 15$, Lin Yu's meal costs 20$, and your meal costs 25$. The total bill is then $60 and everyone decides to split the bill evenly: everyone pays $20. In effect you are undercosted, and Leo Lemes is cross-subsidizing you (as you pay 5$ less than your actual cost).

An example of cross subsidization often occurs in the banking industry. Fees associated with maintaining a low account balance (below $1,000 for example) are charged to these customers to maintain their profitability.

References


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