Essays on Nonlinear Pricing and Welfare

Problems associated with monopoly power have received considerable attention in economic literature. It is well known that a firm exercising monopoly power over a given market can raise its price above the competitive price. This leads to a dead-weight welfare loss for society. In order to reduce the welfare loss that is caused by the pricing behavior of the monopoly, several alternative suggestions have been presented in the literature. One recommendation is to regulate the monopoly in the sense that a social planner specifies the price that the firm is allowed to charge the consumers. A second proposal is to let the government finance the deficit that is associated with marginal cost pricing through taxation. These dividing lines are discussed extensively in Section 1.2. One of the main conclusions from Section 1.2 is that the welfare loss can be reduced by allowing the monopoly to charge the consumers a nonlinear tariff. However, there are other arguments in favor of nonlinear pricing. The two main motivations are: nonlinear tariffs typically Pareto dominate linear pricing rules and nonlinear pricing can be used as an instrument to redistribute income among consumers. Hence, nonlinear pricing can be motivated both by efficiency arguments and by redistributive objectives. Nonlinear pricing and related topics are discussed in Section 1.3. In order to investigate and analyze nonlinear pricing schedules, a theoretical model is required. In Section 1.4, we introduce the "standard" framework for analyzing nonlinear pricing schedules in a finite economy with a (single product) natural monopoly. We state, discuss and motivate the "standard" assumptions in the literature. This framework forms the base on which this thesis is built. In Section 1.5, we specify the purpose of this thesis and summarize the main findings.