Cross-subsidies

Compared to regulation, cross subsidies are a more market-based approach for discouraging air pollution emissions from energy production. Economists generally agree that economic approach-... 

Cross-subsidies occur, as the company is given incentives to expand its production activity even in low-profit productions (for example, producing brand name generics), as it can recover the authorized rate of return for the entirety of the capital invested. 

Companies would thus be practising cross-subsidies between products under patent and products whose patent has expired, in order to maintain their overall income. Other strategic responses are patent extension, the creation of second brands and subsidiaries of generics and the differentiation of the brand product through marginal innovations and promotion campaigns. 

Improving operational performance. Although many customers prefer to have services bundled and to source as many services as possible from a single provider, they have very little tolerance of cross-subsidies between these services. The service organization thus needs to assess each service s performance from a standalone perspective. Customers will certainly do this themselves for those services where markets exist. They will also benchmark natural monopolies, to be able to assert an appropriate level of pressure on the service provider and drive prices down. Service providers, in turn, need to pull operational and structural improvement levers ... 

The real profitability of different products becomes more transparent as cross-subsidies among product lines are exposed. This is a problem intrinsic to the highly integrated production processes of many chemical companies. 

Cross-subsidies are ehminated and uncompetitive businesses are divested or left to go bankrupC. 

Cross-subsidies—in which some individuals effectively subsidize others, through differential pricing of services, for example—represent a third group of subsidies. They are not considered here. 

Furthermore, it is the originating companies who can manufacture out-of-patent products on the cheap. They have already amortized their plant, they have personnel already available, they have optimized the process and the product can share analytical and distribution facilities with in-patent products. The reason that the research based companies appear to have higher costs is an accounting convention that loads the costs of research and development of new products on to products already being sold. This is legitimate in that the cash flow for research and development must come out of current income, but it is an illusion to see it as a higher cost. Rather it is a question of cross-subsidy. 

Unprofitability (Figure 9.3) Ansett was set up in opposition to Air New Zealand, who were well able to protect their market positionby cross-subsidy fromintemational operations. Ansett (NZ) never made an operating profit. The parent airline, Ansett... 

Traditional flat rates are not economically efficient and hide cross-subsidies... 

Competition in long-distance calls was introduced in the 1970s in the US. However, before the divestiture of AT T in 1984, profits from long-distance calls subsidized local calls (Green, Teece 1998, p. 625). The separation of long-distance and local telephony ended these cross-subsidies and drove long-distance prices down. 

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