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Price Discrimination Limits in Relation to the Death Spiral

J. Stephen Henderson

Year: 1986
Volume: Volume 7
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol7-No3-3
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Abstract:
It is well known that a public utility commission may be able to improve overall social welfare by allowing decreasing-cost industries (such as local public utilities) to price discriminate. For this course of action to be practical, the following conditions must prevail: (1) marginal-cost prices do not cover costs and (2) external subsidies are not feasible. Consequently, the need to raise prices above marginal costs means that some social welfare, measured as the sum of consumer's and producer's surplus, for example, must be sacrificed to allow the utility to break even. To minimize this sacrifice, the proportional deviation of price from marginal cost for each service should be correspondingly larger for markets with inelastic demands than for those in which demand is elastic.' This type of inverse elasticity rule seldom is used in practice and is cited here only to illustrate that pure value-of-service pricing may improve overall social welfare.



Arbitrage in Energy Markets: Price Discrimination under Congestion

Bert Willems and Gerd Kupper

Year: 2010
Volume: Volume 31
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No3-3
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Abstract:
During the last decades the production of electrical energy has been liberalized. This paper studies the effect of using a market mechanism to allocate scarce transmission capacity when the incumbent producers remain dominant. We show that granting exclusive use to an incumbent producer is preferred to trading access to this essential facility if interregional production-cost differences are significant and transmission capacity is scarce. This result counters the intuition on third degree price-discrimination, that arbitrage will improve the social surplus when there is no output contraction. The reason is that with arbitrage the incumbent can still charge different regional prices as long as it creates congestion on the transmission lines. As a consequence, welfare will be lower, since the incumbent distorts production decisions to congest the lines. We recommend that a market-oriented access to scarce transmission capacity should be accompanied by additional regulatory or structural measures to address market power.



Nonlinear Pricing and Tariff Differentiation: Evidence from the British Electricity Market

Stephen Davies, Catherine Waddams Price, and Chris M. Wilson

Year: 2014
Volume: Volume 35
Number: Number 1
DOI: 10.5547/01956574.35.1.4
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Abstract:
Liberalisation of the British household electricity market, in which previously monopolised regional markets were exposed to large-scale entry, is used as a natural experiment on oligopolistic nonlinear pricing. Each oligopolist offered a single two-part electricity tariff, but inconsistent with current theory, the two-part tariffs were heterogeneous in ways that cannot be attributed to explanations such as asymmetric costs or variations in brand loyalty. Instead, the evidence suggests that firms deliberately differentiated their tariff structures, resulting in market segmentation according to consumers' usage.





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