WHEN DOES AN OPTIONAL TARIFF NOT LEAD TO A PARETO IMPROVEMENT? THE AMBIGUOUS EFFECTS OF SELF-SELECTING NONLINEAR PRICING WHEN DEMAND IS INTERDEPENDENT OR FIRMS DO NOT MAXIMIZE PROFIT

Optional or self-selecting tariffs allow customers to choose between an established tariff and an alternative outlay schedule. The possibility of making the vendor and at least one consumer better off, without making any other consumer worse off, makes optional tariffs appealing to both economists a...

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Bibliographic Details
Published in:Journal of competition law & economics 2006-06, Vol.2 (2), p.285-299
Main Authors: Panzar, John C., Sidak, J. Gregory
Format: Article
Language:English
Subjects:
Competition policy
Customer services
Demand
Economic impact
Economics
Government sponsored enterprises
Pareto optimum
Pricing policies
Profit maximization
Profits
Public enterprise
Studies
Tariffs
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Summary:Optional or self-selecting tariffs allow customers to choose between an established tariff and an alternative outlay schedule. The possibility of making the vendor and at least one consumer better off, without making any other consumer worse off, makes optional tariffs appealing to both economists and regulators. In economic terms, the introduction of optional tariffs makes possible a Pareto improvement in the allocation of resources. Unfortunately, the presumed desirability of such tariffs depends crucially on assumptions that may not be fulfilled in the case of a state-owned enterprise--in particular, profit-seeking behavior on the part of the monopoly vendor and independence of consumer demand functions. The economic implications and potential consequences are analyzed, in general, of introducing negotiated rate and service terms available to a sole user into a preexisting regulatory regime of uniform tariff rates and conditions of service. The conditions under which it is economically desirable to introduce declining-block rates or other rate structures are identified that discriminate among users of the affected services, with or without any basis in identifiable cost differences.
ISSN:1744-6414
1744-6422
DOI:10.1093/joclec/nhl011