Perfect Price Discrimination is not So Perfect
AbstractThe foundation of the accepted theory on two-part tariffs is the partial equilibrium analysis first developed by Oi (1971). He argues that the profit maximum obtains from a lump-sum payment (equal to the consumer surplus) plus a unit price (equal to marginal cost), and that the resulting allocation is Pareto efficient because it is identical to perfect competition (except for lump-sum transfers to the monopoly). He shows that this outcome is identical to first-degree price discrimination. This analysis is widely included in undergraduate and graduate level textbooks, and is often cited as a basis for the public regulation of utilities. A few general equilibrium papers also validate Oi’s partial equilibrium conclusion. By contrast, we present a general equilibrium counterexample that shows that this conventional conclusion cannot be generally correct.
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Bibliographic InfoPaper provided by University of Utah, Department of Economics in its series Working Paper Series, Department of Economics, University of Utah with number 2005_04.
Length: 14 pages
Date of creation: 2005
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Oi; partial equalibrium analysis; price discrimination;
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