Perfect Price Discrimination is not So Perfect
The 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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- Braeutigam, Ronald R., 1989. "Optimal policies for natural monopolies," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 23, pages 1289-1346 Elsevier.
- Richard Schmalensee, 1981.
"Monopolistic Two-Part Pricing Arrangements,"
Bell Journal of Economics,
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- Braverman, Avishay & Guasch, J Luis & Salop, Steven, 1983. "Defects in Disneyland: Quality Control as a Two-Part Tariff," Review of Economic Studies, Wiley Blackwell, vol. 50(1), pages 121-31, January.
- Sherrill Shaffer, 1991. "Efficient two-part tariffs with uncertainty and interdependent demand," Working Papers 91-14, Federal Reserve Bank of Philadelphia.
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