Cross-Subsidization,Cost Allocation,and Tacit Coordination

This paper considers the prospect that multiproduct firms facing each other in separate markets might tacitly coordinate their production through strategic common service cost allocations and mutually benefit from such action as a consequence. Our analysis suggests that decentralization cum tacit coordination may be possible in equilibrium, with or without public disclosure of allocation choices. In turn, tacit coordination may contribute to explanations for multiproduct firms' decisions to decentralize. The implications for trade oversight bodies are ambiguous. While tacit coordination results in an anti-competitive distortion toward monopolies, it also induces greater specialization which reduces the diseconomies of scope.