Economic Theory - Ellen Muir (Harvard)

ETES Series

More Information

Georgy Artemov

georgy.artemov@unimelb.edu.au

T: +61 3 8344 7029

Title: Ramsey pricing revisited (joint with Simon Loertscher)
Abstract: We study optimal price regulation in a monopoly pricing problem in the Ramsey tradition without restricting the monopoly to set market-clearing prices. Under our perfect regulation benchmark a regulator that seeks to maximizes a convex combination of the monopoly's profit and social surplus operates the firm, subject to the same incentive compatibility and individual rationality constraints as the firm. We determine what instruments enable the regulator to implement this benchmark, assuming that the regulated firm selects the optimal selling mechanism, which may involve price discrimination. When the unregulated firm engages in price discrimination, binding price floors can increase both consumer surplus and social surplus. We provide conditions such that, with costly production, the simultaneous use of a price ceiling and a price floor is sufficient for perfect regulation, whereas as a standalone tool neither a price ceiling nor a price floor is sufficient. The simultaneous use of price ceilings and floors prevents the firm from undesirable price discrimination while inducing production of the quantity that is optimal for the Ramsey regulator.