Cross-subsidization

In a group of companies (corporate group), the central management compensates for the losses of a group company from the profits of other companies. – This is harmful from an economic point of view, because it means that the most efficient offerer (the manufacturer with the lowest costs) does not win the market; in other words, scarce resources are squandered. – Within a company that manufactures different products, the settlement of losses from one business segment by profits from another. Here, too, competition is disturbed and the good does not enter the market at the lowest possible cost, scarce factors are wasted. – The support given by a bank to counterparties with a weak credit rating by charging them the same interest rate for loans as for clients with a strong credit rating. To avoid this, the supervisory authorities require risk-oriented pricing based on a suitable assessment procedure. – Especially in the case of public utilities, tariff fixing that is set in such a way that low-income customers can be served at a reduced tariff (using the revenues from one consumer group to subsidise the tariffs paid by another; this way is commonly used in water, power and other public services to ensure affordable tariffs for the poorer customers). The disadvantage of such a policy is that the subsidized do not act economically and waste the heavily subsidized item. See profit shifting, account hopping, moral hazard, rating, risk adjustment, profit center.

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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