CROSS-SUBSIDY ANALYSIS WITH MORE THAN TWO SERVICES
Thirty years have passed since the publication of "Cross-Subsidization: Pricing in Public Enterprises." The article rigorously defined cross-subsidization and is now a standard citation of regulators and scholars addressing the pricing of regulated multiproduct firms. The incremental cost test and the stand-alone cost test, however, have often been misunderstood and misapplied. This article answers the most common questions that have arisen in the application of these tests for cross-subsidization and corrects the most common errors that have been committed in their application.
* Professor, Business and Public Policy Department, Wharton School, University of Pennsylvania. Email: faulhabe{at}wharton.upenn.edu. This article is an outgrowth of a memorandum that I prepared at the request of Sprint on the application of my earlier work on cross-subsidy to questions that have arisen in regulatory proceedings. It is not an endorsement of any regulatory position of Sprint or any other party. This article is an explication of the principles contained in my earlier work and does not constitute any deviation or modification of that work for any purpose.