Abstract
This chapter discusses the regulation of Ramsey prices. Ramsey prices are one of the best known paradigms of regulatory pricing. Ramsey prices result from a general welfare type of pricing model under some specific assumptions. These assumptions are even more restrictive than the assumptions that yield marginal-cost prices, because of the additional assumption of an exogenously given profit Π°. If sustainability is defined in the chapter as a stationary equilibrium set of product quantities and prices that does not attract rivals into the industry, it can be proved that Ramsey prices are sufficient for sustainability if the natural monopoly's profit does not exceed the sunk entry costs of potential rivals. The chapter discusses many simple regulatory rules have in a full-information framework where the regulator wants to achieve Ramsey prices but faces a manager who wants to maximize profits or output. The manager will use any degree of freedom that is left to him given the regulatory rules. The regulator on the other hand will combine so many rules as to leave no degrees of freedom for the manager. Such a simple-rules approach to Ramsey prices can be treated in the same way as the regulation of marginal-cost prices.
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