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Welfare Effects of Price Discrimination by a Regulated Monopolist

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Author Info
Mark Armstrong
John Vickers

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Abstract

Should a multiproduct monopolist whose "average price" is capped by regulation be allowed to engage in (third-degree) price discrimination? If the cap applies to a price index with weights proportional to demands at uniform prices, then price discrimination benefits consumers as well as the firm. But if -- perhaps more realistically -- it is the firm's average revenue that is capped, then consumers prefer uniform pricing. In this case total output is higher when discrimination is allowed, which increases welfare, but marginal utilities differ across markets, which is inefficient, and the overall effect is ambiguous. A small amount of discrimination is desirable, however. It is better not to allow price discrimination if the price cap is close to the level of marginal cost. The consequences of tightening the price cap when discrimination is allowed are also examined.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 22 (1991)
Issue (Month): 4 (Winter)
Pages: 571-581
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Handle: RePEc:rje:randje:v:22:y:1991:i:winter:p:571-581

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  1. Giuseppe Coco & Claudio De Vincenti, 2003. "Can Regulation Increase Firm'S Efficiency?," Working Papers 60, Sapienza University of Rome, Department of Public Economics. [Downloadable!]
  2. Alberto Iozzi & Roberta Sestini & Edilio Valentini, 2005. "Pricing Discretion and Price Regulation in Competitive Industries," CEIS Research Paper 69, Tor Vergata University, CEIS. [Downloadable!]
    Other versions:
  3. Paul L Joskow, 2005. "Incentive Regulation In Theory And Practice - Electricity Distribution And Transmission Networks," Working Papers 0514, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
    Other versions:
  4. James Reitzes, 2008. "Downstream price-cap regulation and upstream market power," Journal of Regulatory Economics, Springer, vol. 33(2), pages 179-200, April. [Downloadable!] (restricted)
  5. isamu matsukawa, 2005. "Congestion pricing of inputs in vertically related markets," Industrial Organization 0506012, EconWPA. [Downloadable!]
  6. Azar, Ofer H., 2002. "Can Price Discrimination be Bad for Firms and Good for All Consumers? A Theoretical Analysis of Cross-Market Price Constraints with Entry and Product Differentiation," MPRA Paper 4575, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  7. Isamu Matsukawa, 2005. "The Effects of Average Revenue Regulation on Electricity Transmission Investment and Pricing," Industrial Organization 0512009, EconWPA. [Downloadable!]
    Other versions:
  8. Alberto Iozzi & Carla Pace & Roberta Sestini & Edilio Valentini, 2001. "On The Effects Of Regulating Price Discrimination By A Price Capped Firm," Departmental Working Papers 149, Tor Vergata University, CEIS. [Downloadable!]
  9. Gianni De Fraja & Alberto Iozzi, . "Short Term and Long Term Effects of Price Cap Regulation," Discussion Papers 00/61, Department of Economics, University of York. [Downloadable!]
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