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Socially Optimal Pricing with Rivalry and Economies of Scale

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  • Ronald R. Braeutigam

Abstract

This article examines the nature of economically efficient tariffs when there exists rivalry among firms that produce imperfectly substitutable outputs with economies of scale and that operate under a viability constraint. Pricing principles are derived and related to the rules developed in the literature for the regulated monopolist. For some firms excess profits may prevail at efficient prices, and the form of the inverse elasticity rule is altered in markets with rivalry. However, the standard efficient pricing rules and increased welfare results if regulators are empowered to implement lump-sum interfirm payments. A numerical example is provided.

Suggested Citation

  • Ronald R. Braeutigam, 1984. "Socially Optimal Pricing with Rivalry and Economies of Scale," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 127-134, Spring.
    • Handle: RePEc:rje:randje:v:15:y:1984:i:spring:p:127-134
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    Cited by:

    1. Patricia Danzon & Adrian Towse & Jorge Mestre‐Ferrandiz, 2015. "Value‐Based Differential Pricing: Efficient Prices for Drugs in a Global Context," Health Economics, John Wiley & Sons, Ltd., vol. 24(3), pages 294-301, March.
    2. Alberto Cassone & Carla Marchese, 2005. "Welfare Effects of Price Integration in Local Public Transport," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 76(2), pages 257-274, June.
    3. William C. Miller, 2007. "Ramsey pricing with long run competition," Economics Bulletin, AccessEcon, vol. 12(34), pages 1-5.
    4. repec:ebl:ecbull:v:12:y:2007:i:34:p:1-5 is not listed on IDEAS
    5. Kessides, Ioannis N. & Willig, Robert D., 1995. "Restructuring regulation of the rail industry for the public interest," Policy Research Working Paper Series 1506, The World Bank.
    6. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    7. Deb, Kaushik & Filippini, Massimo, 2011. "Estimating welfare changes from efficient pricing in public bus transit in India," Transport Policy, Elsevier, vol. 18(1), pages 23-31, January.

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