Perfect Price Discrimination is not So Perfect

Sara Hsu and David Kiefer

Working Paper Series, Department of Economics, University of Utah from University of Utah, Department of Economics

Abstract: The foundation of the accepted theory on two-part tariffs is the partial equilibrium analysis first developed by Oi (1971). He argues that the profit maximum obtains from a lump-sum payment (equal to the consumer surplus) plus a unit price (equal to marginal cost), and that the resulting allocation is Pareto efficient because it is identical to perfect competition (except for lump-sum transfers to the monopoly). He shows that this outcome is identical to first-degree price discrimination. This analysis is widely included in undergraduate and graduate level textbooks, and is often cited as a basis for the public regulation of utilities. A few general equilibrium papers also validate Ois partial equilibrium conclusion. By contrast, we present a general equilibrium counterexample that shows that this conventional conclusion cannot be generally correct.

Keywords: Oi; partial equalibrium analysis; price discrimination (search for similar items in EconPapers)
Pages: 14 pages
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:uta:papers:2005_04

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