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With linear pricing, can profit‐maximizing monopoly output be socially efficient?

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  • Yong Chao
  • Babu Nahata

Abstract

We revisit the prevailing wisdom that a profit‐maximizing monopolist using linear pricing cannot produce socially efficient output. We show that when market demand function exhibits a flat portion, the prevailing wisdom may not be true. Such a “midway landing” in demand is consistent with weakly convex preferences, and many general demand functions such as any polynomials of degree three and higher. Thus, our analysis demonstrates that the output distortion resulting from linear pricing by a profit‐maximizing monopolist is demand specific. In general, neither monopoly per se nor linear pricing is the main reason for social inefficiency.

Suggested Citation

  • Yong Chao & Babu Nahata, 2022. "With linear pricing, can profit‐maximizing monopoly output be socially efficient?," Bulletin of Economic Research, Wiley Blackwell, vol. 74(1), pages 145-154, January.
    • Handle: RePEc:bla:buecrs:v:74:y:2022:i:1:p:145-154
    DOI: 10.1111/boer.12285
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    References listed on IDEAS

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    1. Nahata, Babu & Ostaszewski, Krzysztof & Sahoo, P K, 1990. "Direction of Price Changes in Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 80(5), pages 1254-1258, December.
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    3. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
    4. Formby, John P & Layson, Stephen & Smith, W James, 1982. "The Law of Demand, Positive Sloping Marginal Revenue, and Multiple Profit Equilibria," Economic Inquiry, Western Economic Association International, vol. 20(2), pages 303-311, April.
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