Ramsey Pricing

This version of price discrimination is sometimes called ‘Second Best Pricing’ since it deviates from ‘First Best’ (allocatively efficient) Pricing where P = MC. If resale can be prevented, consumers in different markets with different elasticities can be charged different prices. However, the prices are set so as to yield only normal profits, so the prices are less than under unregulated price discrimination. Under Ramsey Pricing, resource misallocations (or distortions from pricing above MC) are minimized but not eliminated. Note that customer groups with the relatively inelastic demands pay the highest prices, so that those without substitutes pay the most per unit. Thus, this approach may violate principles of fairness, as evaluated by regulators. Alternative tariff structures for covering fixed costs include multi-part pricing. See rate design.