Explaining cross-supplies

Cross-supplies describe the phenomenon that two or more firms in the same i ndustry supply each other with their final products. A prominent example is the cooperation in the European flat-glass industry, which was recently cr iticized by the European Commission. In a simple model we attempt to explai n what incentives firms may have to use cross-supplies (instead of producin g the goods themselves) and what welfare effects cross-supplies have if the y are used. Contrary to the ruling of the European Commission we find that cross-supplies improve welfare whenever they are employed. Furthermore, for a large range of parameters, they even benefit consumers.