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.