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Welfare Effects of Price Discrimination by a Regulated Monopolist

Author

Listed:
  • Mark Armstrong
  • John Vickers

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.

Suggested Citation

  • Mark Armstrong & John Vickers, 1991. "Welfare Effects of Price Discrimination by a Regulated Monopolist," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 571-581, Winter.
  • Handle: RePEc:rje:randje:v:22:y:1991:i:winter:p:571-581
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    Cited by:

    1. Valentini, Edilio, 2015. "Indirect taxation, public pricing and price cap regulation: A synthesis," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 9, pages 1-39.
    2. Amrstong, Mark & Cowan, Simon & Vickers, John, 1995. "Nonlinear pricing and price cap regulation," Journal of Public Economics, Elsevier, vol. 58(1), pages 33-55, September.
    3. Willington, Manuel & Li Ning, Jorge, 2014. "Regulating a monopoly with universal service obligations: The role of flexible tariff schemes," Telecommunications Policy, Elsevier, vol. 38(1), pages 32-48.
    4. Garella, Paolo G., 2002. "Price discrimination and the location choice of a durable goods monopoly," Regional Science and Urban Economics, Elsevier, vol. 32(6), pages 765-773, November.
    5. Breton, Michèle & Kharbach, Mohammed, 2012. "Transportation and storage under a dynamic price cap regulation process," Energy Economics, Elsevier, vol. 34(4), pages 918-929.
    6. Alberto Iozzi & Roberta Sestini & Edilio Valentini, 2006. "Pricing Discretion and Price Regulation in Competitive Industries," Journal of Regulatory Economics, Springer, vol. 29(2), pages 151-165, March.
    7. Li Ning, Jorge, 2009. "Second-degree price discrimination and universal access under (weighted average) price cap regulation," MPRA Paper 31321, University Library of Munich, Germany.
    8. Kang, Jaesung & Weisman, Dennis L. & Zhang, Mingyuan, 2000. "Do consumers benefit from tighter price cap regulation?," Economics Letters, Elsevier, vol. 67(1), pages 113-119, April.
    9. Braouezec, Yann, 2016. "On the welfare effects of regulating the number of discriminatory prices," Research in Economics, Elsevier, vol. 70(4), pages 588-607.
    10. Giuseppe Coco & Claudio De Vincenti, 2002. "Can regulation increase firm's efficiency?," Working Papers 60, University of Rome La Sapienza, Department of Public Economics.
    11. Azar Ofer H, 2003. "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," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-19, September.
    12. van Vuuren, Daniel, 2002. "Optimal pricing in railway passenger transport: theory and practice in The Netherlands," Transport Policy, Elsevier, vol. 9(2), pages 95-106, April.
    13. Enzo Defilippi, 2013. "X-factor estimation and controversies : the case of Lima´s airport," Working Papers 13-09, Centro de Investigación, Universidad del Pacífico.
    14. Yongmin Chen & Marius Schwartz, 2015. "Differential pricing when costs differ: a welfare analysis," RAND Journal of Economics, RAND Corporation, vol. 46(2), pages 442-460, June.
    15. Defilippi, Enzo, 2015. "X-factor regulation in a developing country: The case of Lima's airport," Transport Policy, Elsevier, vol. 41(C), pages 16-22.
    16. Tirupam Goel & Ulf Lewrick & Agnė Nikola Tarashev, 2017. "Bank capital allocation under multiple constraints," BIS Working Papers 666, Bank for International Settlements.
    17. Herguera, Iñigo & Martinelli, Cesar, 1995. "Regulación de precios de interconexion," DE - Documentos de Trabajo. Economía. DE 10737, Universidad Carlos III de Madrid. Departamento de Economía.
    18. isamu matsukawa, 2005. "Congestion pricing of inputs in vertically related markets," Industrial Organization 0506012, EconWPA.
    19. Matsukawa, Isamu, 2008. "The effects of average revenue regulation on electricity transmission investment and pricing," Energy Economics, Elsevier, vol. 30(3), pages 696-714, May.
    20. Bertoletti, Paolo & Poletti, Clara, 1997. "Welfare effects of discriminatory two-part tariffs constrained by price caps," Economics Letters, Elsevier, vol. 56(3), pages 293-298, November.
    21. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    22. Yann Braouezec, 2013. "The Welfare Effects of Regulating the Number of Market Segments," Working Papers 2013-ECO-11, IESEG School of Management.

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