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The academic debate about the motivations for franchising and its impact on economic welfare is quite passionate. Roughly speaking, on one sidemarkets are asserted to be competitive, so that new business practices can merge only if they improve economic efficiency; businessmen "know theirbusiness" better than economists or regulators do, and the best possible regulatory policy is no regulation at all. On the other side, it is advisedto rule out any kind of arrangement which may restrict one party's freedom of trade - which is the case of practically any provision in a franchisecontract. The controversy reflects the opposition between different schools of economic thought, but it also hinges on divergences in the appreciation ofthe context and of the horizon of the analysis.

The academic debate about the motivations for franchising and its impact on economic welfare is quite passionate. Roughly speaking, on one sidemarkets are asserted to be competitive, so that new business practices can merge only if they improve economic efficiency; businessmen "know theirbusiness" better than economists or regulators do, and the best possible regulatory policy is no regulation at all. On the other side, it is advisedto rule out any kind of arrangement which may restrict one party's freedom of trade - which is the case of practically any provision in a franchisecontract. The controversy reflects the opposition between different schools of economic thought, but it also hinges on divergences in the appreciation ofthe context and of the horizon of the analysis.

AbstractCross‐subsidization arises naturally when firms with different comparative advantages compete for consumers with heterogeneous shopping patterns. Firms then face a form of co‐opetition, as they offer substitutes for one‐stop shoppers and complements for multi‐stop shoppers. When intense competition for one‐stop shoppers drives total prices down to cost, firms subsidize weak products with the profits made on strong products. Moreover, firms have incentives to seek comparative advantages on different products. Finally, banning below‐cost pricing increases firms' profits at the expense of one‐stop shoppers, which calls for a cautious use of below‐cost pricing regulations in competitive markets.

We show that large retailers, competing with smaller stores that carry a narrower range, can exercise market power by pricing below cost some of the products also offered by the smaller rivals, in order to discriminate multistop shoppers from one-stop shoppers. Loss leading thus appears as an exploitative device rather than as an exclusionary instrument, although it hurts the smaller rivals as well; banning below-cost pricing increases consumer surplus, rivals' profits, and social welfare. Our insights extend to industries where established firms compete with entrants offering fewer products. They also apply to complementary products such as platforms and applications. (JEL L11, L13, L81)

The article revisits the conventional wisdom according to which vertical restrictions on retail prices help upstream firms to collude. We analyze the scope for collusion with and without resale price maintenance (RPM) when retailers observe local shocks on demand or retail costs. In the absence of RPM, retail prices react to retailers' information, and deviations from collusive behavior are thus difficult to detect. By eliminating retail price flexibility, RPM facilitates the detection of deviations but reduces profits and thus increases the short‐run gains from a deviation. Overall, RPM can facilitate collusion and reduce total welfare when firms adopt it.