Simon Cowan

Nonlinear Pricing and Price Cap Regulation

Abstract This paper analyzes profit-maximizing nonlinear pricing by a firm that is subject to price cap regulation. Two forms of regulatory constraint are considered: (i) a cap on the firms average revenue, and (ii) a constraint that the firm must continue to offer each consumer the option of buying at the uniform price. Optimal nonlinear price schedules in these regimes are shown to have simple characterizations that are related to the nonlinear tariffs that an unregulated monopolist would charge. Of the regulatory regimes, the firm prefers the average revenue constraint to the option constraint and likes uniform pricing least. Consumers in aggregate prefer the option regime to uniform pricing and like the average revenue constraint least, but there are also distributional effects between consumers. Although the optional tariff regime Pareto dominates uniform pricing, it is ambiguous whether welfare is higher under uniform pricing or under the average revenue regime. An example is used to illustrate the nature of the ambiguity.

Price-Cap Regulation and Inefficiency in Relative Pricing

The allocative efficiency properties of three price-cap schemes are compared. The scheme that uses lagged quantities in the price index and has a fixed cap works well when the firm is myopic but generates inefficient relative prices otherwise. With myopia prices are efficient and welfare is higher than with equal pricing, but the gain to the firm comes at the expense of lower consumer surplus. When the firm is not myopic pricing can be so inefficient that steady-state welfare is below the no-regulation level.

Tight Average Revenue Regulation Can Be Worse Than No Regulation

Price regulation of a multimarket monopolist, with the cap based on average revenue, can cause welfare to be below the unregulated level. In a model with linear demands and constant but unequal marginal costs, a sufficient condition for this welfare effect is that the cap equals the average revenue that would be earned with marginal cost pricing. Relaxation of the price cap can lower all prices. Welfare with uniform pricing at the level of the price cap can be above or below the average revenue welfare level. Copyright 1997 by Blackwell Publishing Ltd

Optimal risk allocation for regulated monopolies and consumers

Abstract The model shows how a regulated monopolist’s price should change as random cost and demand parameters are revealed. The regulator has a Ramsey-type problem. With a linear tariff a trade-off between allocative efficiency and risk sharing typically exists. The attitudes of the consumer and the firm to both income and price risk determine how the price should move. Sufficient conditions are found for price adjustment schemes used in practice to be optimal. These schemes include full, partial and zero pass-through of marginal costs, and price caps, average cost pricing and caps on total revenue for demand risk.

Trade and Competition Policies for Oligopolies

ZusammenfassungAu\enhandels- und Wettbewerbspolitik bei Oligopolen. - In diesem Aufsatz wird ein Modell vorgestellt, das die wechselseitigen Beziehungen zwischen Au\enhandel und Wettbewerbspolitik eines Landes abbildet, das bei einem Produkt ein vollstÄndiges Monopol besitzt. Das Verhalten von Firmen und LÄndern wird durch ein dreistufiges Spiel modelliert, wobei in einem Teilspiel perfektes Gleichgewicht herrscht. Von dem Herstellungsland wird angenommen, da\ es zuerst seine Wettbewerbspolitik festlegt und dann erst die Teilspiele Handelspolitik und Produktion. Das Land wird diejenige Wettbewerbspolitik wÄhlen, die die Zölle, mit denen seine marginalen Unternehmen konfrontiert sind, herabsetzt. Bei einer bestimmten Klasse von Nachfragefunktionen ist es für die Wohlfahrt im Herstellungsland besser, wenn die Industrie dem Wettbewerb ausgesetzt ist und eine Exportsteuer erhoben wird, statt ein Kartell zu bilden.RésuméPolitique commerciale et politique de compétition en cas des oligopoles.- L’article présente un modèle de l’interaction entre la politique commerciale et la politique de compétition si un pays a un monopole économique total. Le comportement des entreprises et des pays est formé par un jeu à trois étapes avec un sous-jeu de l’équilibre parfait. On suppose que le pays producteur détermine sa politique de compétition avant les sous-jeux de la politique commerciale et de la production. Le pays choisira la politique de compétition qui réduit les tarifs de douane avec lesquels les entreprises marginales sont confrontés. Pour une group des fonctions de la demande le bien-Être d’un pays producteur augmente plus vite qu’un cartel si l’industrie est exposée à la compétition et s’il y a une taxe à l’exportation.ResumenPoliticas comerciales y de competencia para oligopolios. - En este trabajo se présenta un modelo de interacción entre politicas comerciales y de competencia para el caso de un país con poder monopólico absoluto. Se modela el comportamiento de empresas y países como un juego de tres etapas con un subjuego en equilibrio perfecto. Se asume que el país productor compromete su politica de competencia antes de hacerlo con su politica comercial y sus subjuegos de producto. El país eligirá aquella politica de competencia que reduzca el arancel enfrentado por sus empresas en el margen. Dados una clase de funciones de demanda, una industria competitiva y un gravamen sobre las exportaciones resultarán en un bienestar mayor para el país productor que un cartel.

Welfare-increasing third-degree price discrimination

The welfare and output effects of monopoly third-degree price discrimination are analyzed when inverse demand functions are parallel. Welfare is higher with discrimination than with a uniform price when demand functions are derived from the logistic distribution, and from a more general class of distributions. The sufficient condition in Varian (1985) for a welfare increase holds for these demand functions. Total output is higher with discrimination for a large set of demand functions including those derived from strictly log-concave distributions with increasing cost pass-through, such as the normal, logistic and extreme value, and standard log-convex demands.

Competition Can Harm Consumers

Duopolists selling differentiated products can generate less consumer surplus than a monopoly selling one of the products. In a Hotelling-type model where a monopoly supplies more than half of potential consumers, but not all, entry by a rival leads to a duopoly price that is higher than the monopoly price. Consumers in aggregate will be made worse off by such entry when the effect of the price increase outweighs the benefit of extra variety. When consumers have continuous demand functions and firms use two-part tariffs, duopoly can also result in lower aggregate consumer surplus than monopoly.

Welfare Consequences of Tight Price‐Cap Regulation

This paper analyses the welfare effects of price-cap regulation of a multi-product monopolist when the price index has fixed weights. A tight cap can result in welfare below the level associated with an unregulated monopoly. This does not occur if the weights are based on lagged quantities and the level of the cap exceeds the previous periods total cost. In a two-period model the welfare problem is alleviated in the second period but first-period performance can be worse if the firm is not myopic. Copyright 1998 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

The Welfare Economics of Optional Water Metering

A model of decentralised metering decisions that applies to the water industry is developed. The social benefit of metering is higher the more sensitive demand is to the price. Allowing households to choose whether or not to have meters is efficient when only small households should have meters but does not work when the regulator does not know household characteristics and only larger households should have meters. The policy of requiring meters to be provided free, which has been adopted in England and Wales, is analysed.