Price Discrimination
Ramsey pricing is an example of price discrimination1. In many situations, price discrimination is efficient in that the differences in prices allow customers to buy more of the service. It does, however, appear unfair to some customers, which can make price discrimination difficult politically. This is a situation where the interests of the government and the operator may be different. As a result, it is often the regulator’s job to understand when some amount of efficiency must be traded for political stability or other considerations. There is a danger, though, that the government may go too far in this tradeoff. In telecommunications, for example, many governments put off the political pain of price rebalancing so long that sector development was delayed and difficult transitions had to be made quickly. Price rebalancing is the process of aligning prices closer to their underlying costs. This topic is described in more detail in Effects of Joint and Common Costs on Pricing.
Footnotes
- See reference section for Principles, Options, and Considerations in Rate Design, the reference section for Economics of Alternative Price Structures and the reference section for Effects of Competition.