With linear pricing, can profit‐maximizing monopoly output be socially efficient?

Yong Chao and Babu Nahata

Bulletin of Economic Research, 2022, vol. 74, issue 1, 145-154

Abstract: We revisit the prevailing wisdom that a profit‐maximizing monopolist using linear pricing cannot produce socially efficient output. We show that when market demand function exhibits a flat portion, the prevailing wisdom may not be true. Such a “midway landing” in demand is consistent with weakly convex preferences, and many general demand functions such as any polynomials of degree three and higher. Thus, our analysis demonstrates that the output distortion resulting from linear pricing by a profit‐maximizing monopolist is demand specific. In general, neither monopoly per se nor linear pricing is the main reason for social inefficiency.

Date: 2022
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