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Second-Best Pricing and Cooperation

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  • Daniel F. Spulber

Abstract

This article studies pricing for natural monopolies by using a cooperative game of joint production. Outputs are allocated by a price system. We introduce the concept of the second-best core, which is a subset of the set of zero-profit, second-best Pareto-optimal prices. Prices are such that no group of consumers subsidizes the purchase of another group. We consider the relations among the second-best core and sustainability, supportability, and natural monopoly. For specific preferences and technology we demonstrate the existence of the second-best core. We design a market mechanism for franchise allocation, which achieves second-best pricing without price regulation.

Suggested Citation

  • Daniel F. Spulber, 1986. "Second-Best Pricing and Cooperation," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 239-250, Summer.
    • Handle: RePEc:rje:randje:v:17:y:1986:i:summer:p:239-250
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    Cited by:

    1. Byford, Martin C., 2015. "A theoretical foundation for the undercut-proof equilibrium," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 209-220.
    2. Martin C. Byford, 2018. "Ex-post price stability with convex costs," International Journal of Game Theory, Springer;Game Theory Society, vol. 47(4), pages 1065-1085, November.

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