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Constrained Monopoly Pricing with Random Participation


  • Basaluzzo, Gabriel
  • Miravete, Eugenio J


We present a flexible model of monopoly nonlinear pricing with endogenous participation decisions of heterogeneous consumers. We make use of the moments that define the few self-selecting tariff options that are commonly used to implement the optimal nonlinear tariff to estimate how demand and cost variables affect the pricing strategies offered by incumbent monopolists in several early U.S. local cellular telephone markets through the different elements of the theoretical model: marginal costs, average price sensitivity of demand, indexing parameters governing the distribution of the two-dimensional type components, support of the distribution of types, and costs associated to the commercialization of tariff options. The sources of identification are the position and shape of each tariff offered by monopolists, the actual number and features of the tariff options used to implement them, as well as a measure of market penetration in each cellular market during the first and last quarter of monopoly regime. We use our model and the structural estimates to provide a performance comparison (profit+welfare) of nonlinear tariffs relative to linear (uniform), optimal two-part, Coasian marginal cost-plus fixed fee, and flat tariffs. We furthermore evaluate the potential welfare gains of implementing universal service requirements.

Suggested Citation

  • Basaluzzo, Gabriel & Miravete, Eugenio J, 2007. "Constrained Monopoly Pricing with Random Participation," CEPR Discussion Papers 6620, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6620

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    References listed on IDEAS

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    Cited by:

    1. Viecens, María Fernanda, 2006. "Two-sided platforms with endogenous quality differentiation," UC3M Working papers. Economics we061204, Universidad Carlos III de Madrid. Departamento de Economía.
    2. Eugenio J. Miravete, 2004. "The Doubtful Profitability of Foggy Pricing," Working Papers 04-07, NET Institute.

    More about this item


    Nonlinear vs. Linear Pricing; Random Participation; Universal Service;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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