crosssubsidies

Crosssubsidy is a pricing practice in which the revenues from one group of customers, products, or services are used to subsidize the costs of another within the same firm or corporate group. They arise when products or services have varying demand, costs, or policy objectives, and the firm allocates costs or sets tariffs so that some customers or lines pay more than their stand-alone cost to subsidize others. Subsidies can be explicit (separate charges or tariffs for a cross-subsidized group) or implicit (tariffs that bundle high-margin and low-margin services, with a hidden transfer of value).

Common contexts include regulated utilities (electricity, water, telecommunications), public services, and some healthcare and transportation sectors. Mechanisms include price discrimination across customer classes, bundled offerings, and internal transfer pricing or cost allocation that disproportionately allocates overhead to higher-paying customers to subsidize lower-paying ones.

Benefits can include financing universal service, improving access for low-income or rural customers, or enabling socially desirable but unprofitable services. Drawbacks include distortions to incentives, reduced price transparency, weakened competitive neutrality, and potential cross-subsidies that misallocate resources if not properly accounted for.

Measurement and regulation: identifying cross-subsidies requires accounting separation and cost allocation rooted in cost-of-service or regulatory frameworks. Regulators may mandate transparency, accounting separation, or explicit cross-subsidies, with sunset clauses or performance-based reforms to improve efficiency.