Crosssubsidizing

Cross-subsidizing is an economic practice where the revenue generated from one product or service is used to reduce the price of another. This can occur within a single company or across different entities. The goal is often to achieve broader market penetration, support less profitable but strategically important offerings, or address social equity concerns.

In a business context, a company might sell a popular, high-margin product at a standard price and use some of that profit to sell a complementary or newer product at a lower price, potentially even below its cost. This can encourage customers to adopt the new product, build brand loyalty, or establish a foothold in a new market. For example, software companies sometimes offer a free basic version of their product to attract users, and then cross-subsidize the development and maintenance of that free version through sales of premium features or related services.

Cross-subsidization can also be observed in public services. Governments or regulatory bodies may allow profitable utilities, like electricity providers, to charge higher rates in affluent areas or for commercial users to subsidize lower rates for residential customers or those in less profitable rural regions. This practice aims to ensure essential services are accessible to all segments of society, regardless of their ability to pay the full cost.

However, cross-subsidization can also lead to market distortions. If prices are set artificially low for one product, it might stifle competition from other providers who cannot afford to operate at such margins. It can also create inefficiencies if companies are not incentivized to manage the costs of the subsidized product effectively. Regulatory oversight is often necessary to ensure that cross-subsidization is used responsibly and does not create unfair advantages or harm market dynamics.